The Telegraph
Since 1st March, 1999
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Jaswant puts economy on war footing

New Delhi, March 5: Finance minister Jaswant Singh has been forced to hatch a “war budget” this year on the belief that the outbreak of hostilities in the Gulf is a certainty.

Singh’s war budget is designed to protect the country from economic tremors that will surely follow.

“Yes, I had to factor in the possibility of a war in the Gulf into the budget….Among other things, total tax collection as a percentage of GDP will be lower than the current year because of this as well as because of tax reforms we are taking up,” Singh told The Telegraph in an exclusive interview over the weekend.

Top finance ministry sources reveal that a fortnight before Singh presented the budget, the National Security Council (NSC) held its second meeting this year and sent a report to him on how the Indian economy could be impacted by the war in Iraq. The report forecast that though European powers and the UN would try to stall for time, a war may well be inevitable as the US had made up its mind on the issue.

While drawing up the budget, Singh had to take into account NSC’s economic impact predictions: a drastic fall in India’s foreign trade, which could badly hit customs collections; and a sharp increase in crude prices to over $ 45 a barrel in case the conflict dragged on for over a month. A crude price spurt would short-circuit India’s economic recovery and lead to lower excise collections.

His predecessor, Yashwant Sinha, could never live down the controversial decision he was forced to take when he was finance minister in the 1990-91 coalition government to take loans from overseas banks against a portion of India’s gold reserves in order to bail the country out of the mess it had landed in when George Bush Sr. and western allies took on Saddam Hussein.

This odious memory has made Singh anxious to become the first finance minister in 55 years since independence to plan his budget with an eye on a war in which India will play no role.

“I factored in all scenarios that are adverse to me,” Singh wryly said, indicating that the conflict scenario in the Gulf had made him tread even more gingerly, while making the tough tightrope walk between political and domestic economic compulsions in Budget 2003.

The minister had deliberately kept tax collection targets low keeping in mind NSC’s warnings. While his budget allows for an increase of just 8.5 per cent in customs earnings, it provides for a mere 10.8 per cent in excise tax collections. Taking into account a reigning 5 per cent inflation rate, this means Singh believes industry may grow by as little as 5-6 per cent.

The unusual fiscal conservatism displayed by Singh, who was foreign minister till last year, was forced by US President George Bush’s stridently radical declarations in favour of war.

In a year when the BJP launches assembly poll campaigns in major north Indian states in a run-up to a general election early next year, the fear of war upsetting domestic economic calculations has forced Singh to opt for measures that would otherwise have been unpalatable.

Singh’s attempt to cut down on the subsidies doled out on account of fertilisers and petro-goods, which total about Rs 19,000 crore, by raising prices and unpopular cess, is not merely to please economists who have been demanding this; it is really a bid to save a mite for the rainy days ahead. “Our subsidy bill has reached a high of Rs 50,000 crore.”

His oil cess led to a rise in petrol and diesel prices by Rs 1.50, and the urea price hike led to a clamour for a rollback.

It’s unlikely that either of the hugely unpopular decisions will be rolled back. North Block insiders say Singh had explained the choice between prudence and immediate unpopularity to his boss even before he finished drawing up the budget. “And the big man (Vajpayee) agreed,” they affirm.

In a similar vein, he has ignored recommendations from top economists who wanted the government to spend its way out of the current low-growth trap, by betting more rupees on grandiose infrastructure plans.

Among others, S. Gurumurthy, formerly an advisor to the finance ministry in the early days of the BJP government and now a leader of the ultra-right Swadeshi Jagran Manch, had advised him that he should stop bothering about the deficit and plan for a huge-spending spree.

Instead, Singh has budgeted to keep the increase in government expenses under check by going in for a strict cash-management system which he hopes will allow him to cap the hike in expenditure at just 8 per cent compared with 10-20 per cent in the last five years.

Although he announced a Rs 40,000-crore road development programme in his budget, he will actually spend less than Rs 2,000 crore, or a mere 5 per cent of this, from the Centre’s kitty this year.

This tight-fistedness has pitted him against a large number of his own Cabinet colleagues.

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