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June 2, 1998


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'The Budget is pedestrian and lacklustre'

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N K P Salve

Some key indicators in the Economic Survey 1997-1998 paint an extremely dismal picture of the Indian economy. A very dynamic and innovative Budget was needed to give a boost to India's moribund economy.

Unfortunately, this Budget has fallen extremely short of such an approach. At best, the Budget is pedestrian and lacklustre. It cannot help revive the economy nor can it impart any buoyancy to the stockmarkets.

The most disconcerting feature of the Budget is the levy of additional direct and indirect taxes of Rs.92.05 billion.

This will increase the inflationary pressure on the economy. The additional levy on petrol is ill-conceived. Perhaps the taxes have been increased to neutralise the effect of sanctions.

The revenue deficit -- at 3 per cent of the GDP -- is very high. So is the fiscal deficit -- 5.6 per cent.

In 1994-95, the exchange of rupee-dollar was Rs 31.40 to a dollar. On Monday, it reached a peak of Rs 41.80.

Something is drastically wrong with our economy. So much so that all-round economic growth in terms of GDP, agricultural production, food grain production, industrial production, exports is showing an alarming decline.

Therefore, unless drastic measures are taken to remedy all these deficiencies, the dollar-rupee exchange rate cannot show improvement.

You must protect the country from going the South-East Asian countries way -- their economies have been crippled because of the unmanageable decline in their exchange rates.

The exchange rate must be controlled by market forces but the latter should not be allowed to so act as would be detrimental to the interest of the country.

In a strong economy, the market forces, to say the least, cannot bring about such deceleration in the value of the rupee. Therefore, my objection is not to the market forces determining the exchange rate, but the market forces themselves manifesting a weak economy.

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.

The package announced for NRIs indicates that some serious effort has been made to generate resources from this important source. One has to see how the NRIs respond. One hopes their patriotism comes to the fore.

Yes, the economy is in a bad shape. It is the unavoidable outcome of a highly controlled and regulated economy. If we had undertaken economic reforms in the late '70s or early '80s, when China introduced such economic reforms, the entire economic situation would have been different.

I must concede that it is easier to sell socialism at the hustings than making a free market economy acceptable in a democracy.

However, China's unipolar political system helped the country to introduce economic reforms ruthlessly.

As for the opening of the insurance sector, competition in every service discipline is the very basis of high productivity and efficiency. I would have been happy if the sector was opened completely so that we get the best advantage of technology and resources from the world's top-most insurance companies.

It is fallacious to argue that opening the insurance sector to foreign companies would be to the country's detriment. We can always have adequate built-in protection to ensure that the large funds generated by foreign insurance companies are used for India's nation-building activities.

As for direct taxes, it is good that they have not been tinkered with. If he had raised direct taxes, that would have spelt sheer disaster.

As it is, the additional levy of Rs 92.05 billion will have an adverse impact. And, in the next few months, maybe we will start touching double-digit inflation.

So the tax payers may, at best, thank the finance minister for not increasing the direct taxes though the savings in terms of purchasing power would be reduced because of inflation.

N K P Salve, former Union minister and chairman of the Ninth Finance Commission, spoke on the Rediff Budget Chat.

Budget '98

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