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June 1, 1998


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'The Budget is inflationary and will hit the poor sections'

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Madhu Dandavate

This Budget which was presented by the FM this evening is intricately connected with the recent nuclear tests in India and Pakistan, and the subsequent decision of the US to apply economic sanctions against these countries. The finance minister, while commencing his speech, admitted this relationship between the nuclear test on May 11 at Pokhran and the presentation of this Budget on June 1.

In his introductory remarks he said, "May 11 was the first step, today is yet another." Having admitted this relationship, though in a subconscious manner, the FM did not take cognisance of the economic sanctions on his Budget proposals.

I have no doubt that in view of the increase of the fiscal deficit from Rs 654.54 billion in 1997-98 to 910.25 billion in 1998-99 proposals. Similarly, in this span, the revenue deficit rises from Rs 302.66 billion to Rs 480.68 billion. Thus, there is a clear indication that the Budget will be an inflationary one, and will hit the poor and the social sectors.

On whether the Budget will boost foreign investment, the answer will depend upon the impact on economic sanctions by the US and other countries and also on the manner in which we in India will do everything possible not to build any euphoria on the issue of nuclear tests and generate the spirit of jingosim that will further alienate us from some nations...

The White House publication on May 13, 1998, has estimated that as a result of the economic sanctions, India will incur a loss of about $ 20.7 billion. On the other hand, the officials of the Government of India have made an assessment that the loss will be anywhere between $ 3 billion to $ 5 billion. To take an objective view, the truth must be in between these two extreme estimates.

Now the important aspect is that in the international financial institution like the World Bank, the voting share of the countries which fully back up the US plan for economic sanctions is only 33.41 per cent... There are countries whose representatives on the Board are either opposed to economic sanctions or are sitting on the fence. The government must eschew any euphoria on the issue. It must not help build up a war psychosis. This way those who are neutral on the question of sanctions can be won to the side of India. This work is urgent.

With this environment, India may not get the necesary loans or financial assistance. The response to foreign direct investmet will not be adequate. The assistance from international financial institutions may be lukewarm and as a result there will be resource and investment crunch that will badly affect the infrastructure sectors like power and thereby industrial development may be slowed down.

If there is inflation which is of a high order, it will act as a disincentive for saving. And therefore I do not expect substantial increase in the rate of saving as a result of the approach of the Budget.

In the previous government, a white paper was published on the merits and demerits of subsidies. On the question of subsidies, I would not like to take a dogmatic attitude of either abolishing the subsidies or retaining it. What is needed is the rationalisation of subsidies so that it reaches the targetted group for which the subsidy is meant. Of course, the increase in the price of urea fertiliser will reduce the quantum of subsidy.

Merely through the Budget, the situation created by US sanctions cannot be neutralised. What is needed is the mobilisation of public opinions from international fora to assure that India wants harmonisation of relations with her neighbours and not any confrontation. if we succeed in our efforts in this direction, the economic sanctions may disappear earlier than expected. At least, in the land of Gandhi and Buddha, the instrument of persuasion should have some efficacy.

Yes, in the present crisis preceded by currency crisis in South East Asia, it is necessary to ensure that India has substantial foreign exchange reserves. This cannot be done merely by borrowing foreign exchange through loans from financial institutions. Such results are volatile and therefore the only alternative is to boost up our exports. We are disturbing the needs of the indegenous consumers.

When I was the finance minister, I handled the problem of abolishing subsidy on diesel in a selective manner. I found that fishermen on the coastal areas need diesel for their shipping vessels. I therefore abolished the duty on deisel oil used by fishermen provided they purchased it through fishermen's corporative societies. When they produced evidence that the deisel was purchased through corporative societies, the duty paid by them was reimbursed. This avoided the misuse of concessions to the fishermen by big truck owners and others. This also encouraged the fishermen to join the co-operative movement and strengthen it.

Whether socialism will survive depends upon how you define it in the present context. If socialism is not turned into a dogmatic instrument of mere statism and the content and direction of socialist ideology is in tune with the ground realities and legitimate aspirations of the people, socialism will continue to be relevant.

Professor Madhu Dandavate, former finance minister of India, spoke on the Rediff Budget Chat.

Budget '98

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