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June 1, 1998


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'This Budget is probably going to turn into a fiscal deficit disaster'

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The biggest improvement from opening up to entry in insurance is likely to be better services for consumers. It'll be a while before investment patterns of the insurance sector (as a whole) are modified enough to have a big impact upon investment. I was really disappointed watching the cheers/boos of the house, though. What a short-sighted set of MPs have we!

I saw a lot of spending in the Budget. Apparently, projections are based on a 14 per cent nominal growth in GDP. That's going to be hard to obtain in the best of times (we would need to get numbers like 6.5 per cent inflation and 7.5 per cent GDP growth). In this case, the estimates of the gross fiscal deficit that Mr Sinha read out might be biased on the downward direction.

The big question now, in my opinion, is how this will be dealt with. There are two choices, both unpleasant -- to monetise the deficit or to undertake market borrowings.

The impact of sanctions is rather mild. I don't see any problem with mostly ignoring them as far as Budget formulation goes.

If I may go off on a tangent, I think all of us focus on the wrong things about government in general and Budgets in particular. We look at the items and how much money is going where. And that's indeed important. But the central failures of the state in India, and the central 'management challenge' in India lie in obtaining good implementation.

Governments are good at starting programmes that sound good. Who can argue with a programme targeted at educating tribal girls? I could see all these MPs exuding smiles; this was the good thing to spend money on. The reality is that government spending is clumsy at best and utterly wasted most of the time. We should pay greater attention to HOW government does things.

Well some good ideas in reform are there. You will forgive me for being sceptical about PSU disinvestment -- one has been hearing about this for too many years. But yes, it was new hearing a government say they want out of most PSUs till 26 per cent and they want out of Indian Airlines till 49 per cent.

As for insurance, I would highly welcome free entry by foreign insurance companies in India! Why would we, as citizens of India, be better off with a less competitive insurance sector?

Oh I'm sure the unions will make a fuss. If we look back at the history of banking reform, there was a protracted period when it appeared that the unions would be able to stall things. (Recall that unions didn't want computers to be used in banks). In the case of both insurance and IA, I see this administration as being willing to expend political ammunition on these problems. I think it is a good sign.

Don't get me wrong. This isn't a great Budget. This is probably going to turn into a fiscal deficit disaster. But it's better than some of the stuff which I'd conjured up, based on the media hysteria about Indian industrialists wanting to roll back economic reforms, and the BJP's swadeshi pronouncements.

I see this as being a part of a process. I remember a time in India when it was heresy to suggest any PSU disinvestment. Later, it was heresy to talk about selling off more than 50 per cent. Now at least we're at the point of talking about 26 per cent. I now expect to see implementations nudging the number towards 26 per cent, and talking commence about going to 0 per cent.

I think that Indian industry is living in the decades gone by when they think in terms of raising tariffs to deal with competition. I think:
a. A regime of extreme competition, low profits, and a steady pace of bankruptcy is here to stay and;
b. what they ought to be really asking for is a fully floating rupee. If exports were really weak owing to an artificially overvalued currency (which is probably the case) then a truly floating rupee is the answer. The rupee should not be a part of the policy instruments of the government.

By raising customs tariffs, India is signalling that the interests of the mass of consumers (who are spread out and cannot easily do lobbying) are less important in public policy-making than the interests of producers (who are few, gain directly, and can do focussed lobbying). Generally, economists think that a country hurts itself by introducing customs tariffs.

Dr Ajay Shah, assistant professor, Indira Gandhi Institute of Development Research, spoke on the Rediff Budget Chat.

Budget '98

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