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June 1, 1998

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'The vulnerability of the Budget is likely to be revealed by the impact of the excise and customs burden'

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S S Bhandare

Yashwant Sinha has addressed the long felt need of the Indian industry to provide a level playing field by the imposition of the special import duty of eight per cent. Indian industry has for long pointing out the extent of distortions due to various factors. For example, while customs tariff was reduced drastically, there has not been similar reduction and rationalisation of excises.

Many people were expecting tremendous pressures on the fiscal management due to the needs of infrastructure spending, defence, the social sector etc. Yet, without massive resource-raising efforts, the FM has done a good job in keeping the fiscal deficit to 5.6 per cent of GDP. How can he manage this?

One would have preferred that the insurance sector be opened up to the foreign companies too. But considering the resistance from Indian political groups and trade unions, the effort is commendable. It will pave the way for foreign companies to be invited subsequently.

The Achilles heel of the Budget has been revealed by the initial adverse reaction from the stock market since his disinvestment programme is largely dependent on the vibrancy of stock market sentiments. Therefore, market players were expecting that the Budget would contain measures like buy back options, incentives for saving etc which are not there. This must be the major disappointment...

The applicability of 8% import duty on a 100% export oriented business should not be there. If a hardware end or communication equipment is imported for domestic operations with the increase in duty, the landed cost will be more expensive. My own feeling is for 100% export units 8% would not be applicable. I am not too happy with the 8% additional duty.

The vulnerability of the Budget is likely to be revealed by the impact of the excise and customs burden, aggregating to over Rs 80 billion. Certainly, this will create cost pressures on certain segments of industry and may aggravate inflationary pressures.

In recent weeks, the inflation rate has been going up -- it is already around 6.4 per cent on a year-on-year basis. Further, if there is going to be a setback to agriculture once again, the supply management will become critical

What I appreciate most in the Budget is: First, the emphasis on infrastructure investment; second, the focus on the housing sector; third, the effort to mobilise resources from NRIs; fourth, the consideration for reorganisation of the public sector enterprises, offering safety nets to employees; and fifth, the willingness to reduce government stake in PSUs to 49 per cent.

Unless one sees the Budget documents, it is difficult to unravel the actual impact of the sanctions. In the meantime, on the basis of various expert opinions, it seems that sanctions would have a direct impact of not more than $ 1.5 billion to $ 2 billion in terms of reduction in capital flows (Rs 600 billion to Rs 800 billion).

On the basis of the package of measures proposed for NRIs, there has been some serious effort to generate resources from this important source. One has to see how the NRIs respond. One hopes their patriotism comes to the fore.

There is one question that needs to be asked, despite the swadeshi posturing the Budget does not deviate in any significant way from the path chalked out by Dr Manmohan Singh and P Chidambaram.

It is almost impossible for any finance minister to present the Budget in a political vacuum. Here is a worst-case scenario of a coalition government of 18 parties with so many divergent pulls from regional parties. In such a situation, the task of the finance minister is to provide goodies to everyone.

S S Bhandare, chief economist, Tata Services, spoke on the Rediff Budget Chat.

Budget '98

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