The Telegraph
Since 1st March, 1999
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The author is former governor, Reserve Bank of India

The finance minister, Jaswant Singh, has presented a budget that is daring and competent at the same time. He has hit the bull’s eye by incorporating various new initiatives and providing for an adequate level of investment while managing to implement important tax reforms. The only fly in the ointment is the relatively high level of fiscal deficit, which worries economists who fear the return of inflation.

The Jaswant Singh budget was expected to give the government’s decisions on the Kelkar prescriptions. Singh has adopted the sensible option of selective implementation. He has decided not to remove all exemptions at one go even though he has accepted the major recommendation to remove tax on dividends and capital gains tax on equity-related transactions. He has, in fact, not been captive to the doctrinaire position against exemptions. He has introduced new exemptions for the healthcare industry, making investment in that industry attractive. He has also introduced a scheme friendly towards senior citizens, through a monthly pension scheme in return for an initial sum invested, guaranteeing the difference between premia income and expenses. He has improved the tax treatment of senior citizens.

His changes in indirect taxation are quite significant and may contribute to the lowering of prices of many goods, apart from making industry more competitive. His tax reform for textiles is quite innovative. Jaswant Singh’s tax package may have its critics, but overall its direction is right in the sense that it encourages compliance and manufacturing efficiency.

Among Singh’s budget initiatives, one of the most effective is the debt swap measure proposed to tighten the states’ debt burden. Singh has been equally imaginative in proposing a repurchase of the government’s debt from the banks, with the premium they gain being deployed for providing for non-performing loans. A win-win solution, which helps the government as well as the financial sector.

An important initiative the finance minister has announced is related to the changes in the pension scheme for new government employees, based on defined contribution. The decision announced by the finance minister to set up a new independent pension fund regulatory and development authority is welcome, although one would have expected the existing Insurance Regulatory Development Authority itself to be competent enough to be entrusted with this new charge as insurance organization will be involved with pension funds.

The budget speech underlines the emphasis of the government on the provision of new infrastructure. It rightly notes the backward linkages that such investment has with the growth of manufacturing industry, especially in the core sector of steel and cement.

It is important that the finance minister has restored the concessions in income-tax in respect of housing loans because housing will give a boost to cement and steel industries. The budget has struck the right note in its emphasis on key investments and the need to encourage public-private partnerships therein. The announcements in regard to such partnerships in building the new airports at Hyderabad and Bangalore are symptomatic of the new pragmatism of the government.

The budget numbers are quite on predictable lines. Interest expenditure has been contained, thanks to various initiatives on the interest rate front. The revenue deficit stands at Rs 112,000 crore, about 30 per cent higher than the estimate for 2002-03. Major subsidies in the budget estimate 2003-04 estimated at roughly Rs 50,000 crore compared to BE 2002-03 of Rs 44,000 crore symbolizes the success of hope over experience. It is surely likely to be exceeded. Estimates of total defence expenditure at Rs 65,000 crore are also likely to be exceeded if the border situation worsens.

Divestment receipts are estimated at Rs 13,200 crore, compared to the latterly studies of 2002-03 of Rs 3,360 crore. Every year, the budget assumes a higher receipt and revises it downwards — reflecting the political uncertainty that clouds divestment. The budget estimate of 2003-04 suffers therefore from the usual malady of conservative estimation of expenditure and optimistic estimation of receipts — an error which will be discovered only later in the year.

The latest budget comes at a defining moment for India’s economy. While one was apprehensive at the outset that the finance minister may refrain from a bold investment plan for fear of fiscal deficit, he has disproved such fears. One hopes that the corporate organizations and the rural economy will respond adequately to the initiatives announced by the budget and make the fears of pessimists turn out to be illusory.

The budget deserves more than two cheers for its boldness of design and commitment to growth with stability. The finance minister deserves to succeed in his mission to bestir the sleeping giant that is India.

The budget is, however, only a statement of intentions. Its success depends on how well its promises are implemented. The feel-good factor of the budget should not lull the finance ministry and the government into a state of complacency. The hardest part of the task is still ahead — to translate the dreams of the budget into realities. The budget of Jaswant Singh may stir the markets for the time being. But whether it will bestir the economy depends on how it is translated into action. In this task, we wish Singh and his aides — and therefore India itself — the best of luck.

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