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June 5, 1998


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Budget does little to aid industrial recovery

The Centre for Monitoring Indian Economy

The Union Budget does not contain much to aid the recovery process of the industrial sector. The Economic Survey had indicated a slew of policy measures to revive the industrial sector.

These included revival of the primary capital markets, encouragement of private and public sector investments and relieving infrastructural bottlenecks, among others. However, the Budget does not contain any measures which would directly influence any of the above and therefore the process of industrial recovery.

The single measure which can be considered as a sop to industry, albeit a retrograde one, is the eight per cent increase in customs duties on import of most non-capital-goods industries.

The public sector units equity disinvestment is budgeted to yield Rs 50 billion during 1998-99. Gas Authority of India, Indian Oil Corporation, Videsh Sanchar Nigam and Container Corporation of India have been identified for this purpose. The Central government has also proposed to restructure Indian Airlines, and bring down its shareholding in the company to 49 per cent in three years.

The Budget does not address the issue of how this disinvestment programme would succeed given the pathetic record in the past.

During 1992--93 to 1997-98, the receipts on this count added only to Rs 117.52 billion, against Rs 293 billion budgeted for the purpose.

The central government has also announced a policy decision to bring down government holding to 26 per cent in public sector units engaged in non-strategic areas.

The central government has referred 50 PSUs to the Disinvestment Commission for its advice and recommendations. Out of this, recommendations were received for 41 PSUs till March 1998.

The Commission has recommended disinvestment to various levels for 12 PSUs, strategic sales of 21 PSUs, and ``no disinvestment at present'' for eight enterprises.

A Reconstruction Fund is to be set up to provide for workers compensation for loss-making PSUs which are to be closed down. The Fund would get recouped from the sale proceeds of assets, after settling all pending liabilities, once labour is separated.

A new generous compensation (safety net) package, similar to voluntary retirement schemes, would be worked out for workers when loss-making, unviable PSUs are closed. Workers with more than 30 years service are to get more under the compensation.

The Board for Industrial and Financial Reconstruction has identified 10 central PSUs for winding up as of March 1998.

The Budget has assigned significant importance to the small scale sector units. Some of the measures would help in debottlenecking liquidity problems faced by the SSIs.

For example, the Reserve Bank of India would take steps to strengthen the mechanism of discounting of bills by the SSIs. The apex bank would also modify guidelines to commercial banks to take into account the overdue outstandings to SSI suppliers while doing credit appraisal for large units.

Bank managers of specialised SSI branches would be delegated more powers to ensure that most credit proposals are decided at the branch level.

At present, banks determine the working capital limit at 20 per cent of the annual turnover for SSIs with working capital requirement of up to Rs 20 million. This would be raised to Rs 40 million. This is expected to ease banks credit flows to SSIs.

However, the enhancement of the exemption limit for excise from Rs 3 million to Rs 5 million and the flat nominal excise duty of five per cent on clearances between Rs 5 million and Rs 10 million would only contribute to the encouragement of inefficiencies.

The central government has decided to delicense coal, lignite and petroleum products.

The central government has also initiated talks with state governments to explore the consolidation of regulatory legislation relating to industry to make inspections less bureaucratic and burdensome for the industry.


The Budget has attempted to provide a strong stimulus to the infrastructure sector through larger public and private investments. The plan outlay for energy, transport and communications has been increased by 35 per cent from the revised estimates of Rs 452.52 billion in 1997-98 to Rs 611.46 billion.

However, compared to the Budget estimates of 1997-98, the increase is only 16 per cent. During 1997-98, the utilisation of outlay works out to around 86 per cent. It is this lower utilisation of the outlay in 1997-98 which makes the current year's outlays appear to be large.


The energy sector plan outlay for 1998-99 has been stepped up by 42 per cent over the revised estimates for 1997-98. As against the revised estimates of Rs 211.20 billion in 1997-98, the outlay for 1998-99 has been fixed at Rs.300.82 billion. This would account for about 29 per cent of the total Central plan outlay for the year. In comparison with the Budget allocations in 1997-98, the 1998-99 outlay shows an increase of about 24 per cent.

Over 31 per cent of the outlay for energy has been allocated to the ministry of power. At Rs 95 billion, outlay for power during 1998-99 is higher by about 41 per cent over the revised estimates of Rs 67.38 billion in 1997-98.

In terms of physical targets, about 3,300 MW of additional power- generating capacity has been envisaged during 1998-99. Apart from this, 2,800 villages will be electrified and 251,000 pumpsets energised. Electricity generation is set to increase by nearly seven per cent to 450 billion KWH during the year.

The government would evolve a guarantee scheme to cover dues of state electricity boards owed to the central public sector units amounting to Rs 100 billion. This would enable the PSUs to raise resources either by securitising these debts or by directly entering the market.

The coal and lignite sector has been delicensed. The outlay for the ministry of coal has been increased by 69 per cent from the revised estimates of Rs 23.92 billion to Rs 40.53 billion. However, the revised estimates for 1997-98 were utilised only to the extent of 70 per cent of the Budget allocation indicating the inability of the sector to absorb large funds. Most of the coal projects are linked with external funds and it is likely that the current allocation too may not be absorbed.

The central plan outlay for the ministry of petroleum and natural gas has been increased by 33 per cent from Rs 115.60 billion to Rs 153.90 billion. The outlay for the ministry accounts for almost 51 per cent of the total outlay for the energy sector. The utilisation of outlay during 1997-98 has been quite satisfactory.

The petroleum refining sector has been delicensed. The tax holiday for the commercial production of oil has been extended to the oil-refining segment also.

Import duty on crude oil has been reduced from 27 per cent to 22 per cent. The resultant revenue loss of Rs 9.65 billion would be recouped by raising the excise duty on petrol from 20 per cent to 35 per cent and imposing customs duty on kerosene imported for parallel marketing at 32 per cent.

The central plan allocation to the ministry of non-conventional energy sources has been fixed at Rs 7.31 billion. This is 15 per cent higher than the Budget allocations and 57 per cent of the revised estimates for 1997-98.


The central plan outlay for transport has been fixed at Rs 161.86 billion as against Rs 129.85 billion in 1997-98; an increase of 25 per cent. Compared with the Budget allocations for 1997-98, the outlay for 1998-99 is higher by only eight per cent. The 1997-98 revised plan outlay for the ministry of civil aviation and the ministry of surface transport has been much lower at around 70 per cent of the Budget estimates.

In order to make available finance for road development, a cess of Re 1 per litre would be levied on petrol to generate Rs 7.90 billion to fund national highways expansion projects. However, the road policy still remains one of the hurdles against investments in the road sector.


The central plan outlay for communications would go up by 33 per cent from the revised estimates of Rs 111.37 billion to Rs 148.78 billion. In comparison with the Budget outlay of 1997-98, the 1998-99 outlay is up by only 11 per cent.

The outlay for the department of telecommunications at Rs 148.88 billion for 1998-99 is higher by 11 per cent over the Budget estimates and by 33 per cent over the revised estimates of 1997-98. During the year, 4.1 million line capacity will be added and 3.6 million direct exchange lines connected. This is slightly lower than the expansion in 1997-98.

Among the other concessions for the sector, the tax holiday applicable to the telecommunication sector has been extended to radio paging and Domestic satellite services.

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Budget lacks fiscal discipline

Budget '98

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