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June 2, 1998


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'The policy on PSU disinvestment is the most striking feature of the Budget'

Y S Deosthale

A lot was expected from the Budget, considering the fact that this was the first Budget to be presented by the new government and also because of the present state of affairs of the economy.

On balance, the expectations have been met. There are several positive aspects of the Budget and a few unanswered questions. On the positive side, a lot of thrust has been given to infrastructure, housing and a beginning has been made as regards the government's policy on PSU disinvestment. In fact, the policy on PSU disinvestment is the most striking feature of this Budget.

Another welcome feature is the continuation of the reform process and non-disturbance of the direct tax structure. The big disappointment is in the areas of exports, capital markets and boost to savings.

The provision of an eight per cent countervailing non-Modvatable import duty has been introduced in respect of all imported goods except a few. Certain items such as crude oil and capital goods which are allowed to be imported under zero duty provisions, have been excluded from the purview of this 8 per cent import duty. However, the provisions relating to capital goods sector are not clear and one needs to really look at the Budget documents for further comments.

I'm not clear how the textile industry will be worst hit after the sanctions. However, I agree there are no specific provisions in the Budget for this industry.

An employee stock option scheme has been proposed for the software industry. It's mainly to arrest the flight of software talent from the country. The details have yet to be announced. In principle, however, it is a good provision. The introduction of index futures has been recommended by the Committee on Derivatives and it is a step in the right direction.

There is some protection given to Indian industries by imposing a countervailing import duty of 8 per cent across the board. Some of the industries such as steel which have been passing through a very difficult period should get some respite due to this provision.

There are a lot of measures introduced for housing and infrastructure sectors. Hence, industries such as cement, power, housing should benefit from these measures. Some proposals have been introduced for investment by NRIs in the secondary market. These should have beneficial impact on the stock market. However, there are no provisions to bring back small investors to the stock market.

It's possible that FIIs will consider the import duty provision as a retrograde step and may not respond favourably. Overall, however, the stock market should respond favourably. The immediate response of the stock market should not be given to much of importance.

To the best of my knowledge, sanctions have not been imposed with reference to exports from India. They mainly relate to financial support from the US government and related agencies to Indian government or related undertakings. There are some restrictions on exporting technology to India. As of now, there are no sanctions on trade.

There are several proposals in the Budget for giving a boost to the housing sector and infrastructure areas. Apart from these, industries which support these two sectors such as cement, steel, etc are also expected to benefit.

The Budget does offer some protection to Indian industries. However, in my opinion, Indian industries should not live on such protection for a long time. They should learn to survive in a competitive environment by improving internal efficiencies, quality consciousness, and process improvements. Since the government has given the industries some time to face the competition, they should utilise this opportunity to substantially increase their presence in the global scene at the earliest.

On a macro-economic level, the topmost item on my wish list was prudent fiscal management and aggressive PSU disinvestment by the government.

Subsidies are needed to some extent in a developing country like ours. However, the government has announced a plan for phasing them out. We should be happy that there is no major increase in subsidies in the present Budget. Let's hope that there is a greater realisation for phasing out this disease.

If the overall economic activity picks up due to increased government spending, the core sector industries will benefit. The emphasis on infrastructure development and housing will benefit core sector industries and industries such as steel and cement.

A certain amount of fiscal deficit is not bad for a developing economy such as ours. However, our problem is, we have not been able to contain the fiscal deficit in the last year to the budgeted level. The answer lies in the overall pick up in the economy which would increase government revenues enabling control over fiscal deficit.

However, I'm not an advocate of government increasing expenditure on an overall basis. What they need to do is to reduce current expenditure and substitute the same by planned capital expenditure. In the Budget, while there is not much of reduction in the current expenditure, an increase has been proposed in planned expenditure. If the estimates on revenues go haywire, fiscal deficit would go up, which is not good for the economy.

Y S Deosthale, director and member of the board, Larsen and Toubro, spoke on the Rediff Budget Chat.

Budget '98

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