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June 2, 1998


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'The opening of the insurance sector will send a powerful signal which will attract all kinds of investments'

J Rajagopal

First up, I am not an economist, but I do look at the Budget from the point of view of a professional advisor who consults with international and domestic companies.

I think it is a growth-driven Budget, the impact of which will be felt not in the short term, but in the medium to long term. The primary reason for this is that the main engine for growth is the infrastructure sector which, as you know, has a long gestation period.

Before we open up any sector to private and foreign investment, we have to ensure that there is a proper regulatory framework to ensure the sound functioning of that industry.

While I agree with you that the United States has some severe problems in its economic framework, one of our advantages is that we could learn from the experiences of other countries and ensure that our policies reflect the best practices from the international scene.

In my opinion, the opening up of the insurance sector has been long delayed, and it is about time it found its place on the top of the reform agenda. The insurance sector mobilises capital for infrastructure development by garnering savings from the people.

In our country, the Life Insurance Corporation has penetrated only 20 per cent of the potential market. The entry of new private andforeign insurance companies will expand this market and tap into the savings that is out there.

Successive governments are trying their best to increase inflow of tax revenue. The last government introduced VDIS, and this government is betting that continued lower tax rates and simplifications of forms and procedures will improve compliance. Given the long history of tax evasion in this country, I think it will be sometime before we see more tax generation.

In the foreign investment sector, first and foremost, they must have a clear and consistent strategy to attract FDI. This has to be bold and imaginative, and sufficiently attractive to get the attention of the international business community. Secondly, successful projects should be given wide publicity. Thirdly, we must remember that as much as two thirds of China's FDI comes from overseas Chinese based in South East Asia. Similarly, we should make a special effort to attract NRI investments.

Based on my interaction with our clients, I have not sensed a negative attitude towards investing in India post nuclear. As of now, it seems business as usual.

In my opinion, the opening of the insurance sector will send a powerful signal which will attract all kinds of investments, including those from FIIs.

I think this Budget has a slight swadeshi flavour, as can be seen in the imposition of the 8 per cent flat import duty on all imports. However, the FM has tried to strike a balance by the opening of the insurance sector and providing for procedural incentives for foreign companies.

As to how long it will be before the insurance sector takes off, in my opinion it will take at least two to three years. I doubt very much if purely Indian-owned companies will have sufficient knowledge and expertise to get into this sector. This means that they will have to do joint ventures with foreign companies, and then these JVs will go about getting a license and setting up an infrastructure. All this will take time.

We have been talking about PSU disinvestment for many years now. I hope the present government will finally take some action. You will note that the FM has talked about closing down unviable PSU units -- something that no other FM has ever stated.

As to the proposal regarding Indian Airlines, one has only to look at the experience of British Airways to take heart. BA was a government-owned company, and the diversement of government equity and sound management has today made it one of the most efficient and profitable airlines in the world.

The stock market seems to suffer from a lack of confidence both in the economy and in the government. Hopefully, this government will last its full term and the Budget will send the right signals.

As far as the real estate market is concerned, given the proposed abolition of the Urban Land Ceiling Act and the incentives given to the housing industry in this Budget, it is likely that the real estate market may fall even further in some cities.

J Rajagopal, managing director, Coopers & Lybrand, spoke on the Rediff Budget Chat.

Budget '98

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