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June 1, 1998


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'This disappointing Budget ignores India's changed economic environment after the nuclear explosions'

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Dr Arjun Sengupta

It is a very disappointing Budget. It is bureaucratic, goes into many details and shows little change in direction and completely ignores the totally changed economic environment of India after the May 11 nuclear explosions and the sanctions of some of the major industrial nations.

The finance minister should have shown leadership and imagination and should have introduced measures to suggest that we are prepared to face the new world.

I have never been a trenchant critic of liberalisation. In fact, I have been a member of the team which first started the process of liberalisation in India in the early 1980s. My only criticism of the way the liberalisation process was introduced in the 1990s was that it did not recognise that in a democracy like India, a simple process of market deregulation is (a) not workable and (b) not sustainable, unless simultaneous measures of structural adjustment and social development are also implemented.

In any case, the current Budget, to my mind, makes a major mistake of raising import duties giving a wrong signal to investors both in India and abroad. We all support strong development of indigenous industries. But one thing we have learnt is that indigenous development does not depend on protectionism.

For quite some time our industry would need strong support from the government because of our underdeveloped infrastructure, market imperfections or even absence of markets and many other incapacities resulting from underdevelopment.

But solving that does not mean we have to distort the market prices of either the inputs or the outputs and that exactly what protectionism does. What is necessary is to promote competition and help our indigenous industries to develop their capacity to compete. But, surely not to nurture them behind a protective wall.

What he should have done is to go out of his way to promote foreign investment and prove to the world that we are going to be a strong team player in the international trade and capital markets. These were necessary even before but today, after the imposition of the sanctions, they are even more important. He took a bold step by opening the insurance sector to the domestic private sector. But why did he stop at that and not allow foreign investment?

But why did he limit PSU disinvestment only to Rs 5,000 crores? The stocks of many of our major public enterprises can be sold abroad and if there is a prospect of their management being completely free from government control, the value of their shares will also go up enormously. But then these shares must be sold to foreigners because domestic sales would only displace private investment. The finance minister should have taken the bold measure of offering the shares of our public enterprises to a much larger extent to foreign investors.

I believe the Planning Commission still has a major role to play in India.

1. This is the only institution that intermediates between the Centre and the states. The Finance Commission just looks into the devolution of resources. The Planning Commission looks into the whole process of interaction. Even in a completely market economy, so long as the central government has command over resources and engages in expenditure affecting the whole country, you would need an institution like the Planning Commission to play the role of intermediation.

2. The Planning Commission now has to devote itself to planning for policies and not just to planning the investment allocation. In a market economy, where the state has still a role to achieve certain objectives which market forces alone cannot realise, it is the policies which matter. The policies have to be set in a medium-term context and in a coordinated manner, affecting several sectors simultaneously. That is where we need planning.

3. There are sectors like infrastructure, social development, regional balance and technological development where the state still has some direct role to play and planning commission must work to design a rational approach to those state policies.

There is nothing wrong in selling some assets of public sector enterprises and use the proceeds for financing expenditures which only public sector can do, namely -- social development, education, health, women and child development. Or even development of technology. Although this expenditure is regarded as current expenditure in the Budget, they are in the nature of investment in human capital and therefore they create assets.

I was questioning Rs 5,000 crores because I believe that if we are prepared to sell shares of some of our very good companies and sell the shares abroad we could get much more than Rs 5,000 crores.

I consider Disinvestment Commission chairman G V Ramakrishna's prescriptions are very much worth considering because he is a very competent expert. But I believe that the valuation, the timing and extent of the sale of the shares should be left to the management of individual companies. And for that reason, the management should be given complete autonomy. And on Rs 5,000 crores, I suspect this amount has been quoted because even now disinvestment is targetted for domestic markets. If foreign markets were taken into account, we could get much more provided we mean business.

It is true that this Budget is a continuation of the Budget process that was introduced by Dr Manmohan Singh and followed by P Chidambaram. The increase in import duty has gone against the stream, but disinvestment proposals are a step forward. But my difficulty with this Budget is that this would have been all right, a bureaucratic and cautious extension of the previous Budgets provided we were living in the world of pre-May 11...

I was one of the persons who argued till the end of April that India has a potential of 7 per cent growth and we should correct the decelaration of growth to 5 per cent last year by a expansionary public investment policy and more relaxed monetary policy even if that meant a marginal increase in fiscal deficit.

Unfortunately, fiscal deficit increased to 6 per cent compared to the Budget estimate of 4.5 per cent but without any noticeable increase in public investment. That was the failure of the last government and the new government could have corrected it without much difficulty.

But after May 11, our whole environment has changed. We must now be prepared against a possible crisis created by drying up of foreign flows if not a reverse flight of that capital. I do not think we can afford the luxury of a higher fiscal deficit or relaxed monetary policy. As a result, we may suffer from a continued low rate of growth. But we cannot relax on government policies any more.

The only way we can promote growth today is by doing everything to promote exports and to invite foreign capital. The concept of swadeshi has to be given up in this situation. When swadeshi means preventing foreign competition.

If we do not have substantial inflow of foreign savings, the domestic rate of investment will come close to equality with the domestic rate of savings which is now 26 per cent. However we may try, it is impossible for us to have a domestic saving of 30 per cent as the BJP agenda calls for.

With a lower rate of investment, we shall have to settle for a lower rate of growth than what we had achieved during the 8th Plan. This is not acceptable in our country, with our problems of unemployment and poverty, the eradication of both of which requires higher rate of growth. Absence of positive measures or even signals for inviting foreign savings is the crucial lacuna in this Budget. This has been made even more critical because of the sanctions that have been imposed.

Let me share with you another reason for my disappointment. Very few people know that Yashwant Sinha as finance minister of the Chandra Shekhar government had prepared a most revolutionary Budget in 1991. In many ways, that Budget was more radical than the Budget that was presented later that year by Dr Manmohan Singh when he introduced the Narasimha Rao package of economic reforms. For reasons quite well known, Yashwant Sinha's Budget could not be presented to Parliament.

If it were, it probably would have been a major Indian response to the 1991 crisis. I thought that this time again, when we are facing another major crisis, Yashwant Sinha would rise to the occasion and present an equally radical Budget. He did not and that is why I was disappointed.

Dr Arjun Sengupta, the wellknown economist and member of the Planning Commission, spoke on the Rediff Budget Chat.

Budget '98

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