May 30, 1998
The Rediff Budget Special:Rahul Bajaj
'Sell the public sector units to raise revenue'
First, it is wrong to say I whole-heartedly praised last year's Budget, but I liked certain features of it. They concerned the tax cuts: reducing the maximum marginal rate of tax on individuals to 30 per cent, reducing the surcharge on corporate tax to 35 per cent, and completely removing tax on dividend. Besides these three aspects, little else was great in the previous Budget.
But these three things in India made a difference. We were used to a marginal tax rate of 95 per cent plus a wealth tax: combined, it amounted to over 100 per cent. Now that these have gone (wealth tax went a few years ago), it is a bonanza for top businessmen, because most of their income is from dividends. This does not apply to the poor person, who did not call it a dream Budget. But rich industrialists were so tired of the burden of direct taxes that made them cheat and keep black money, this was for them a dream Budget.
The problem was, and where Mr P Chidambaram did not agree with us last year, was that industrial growth was going down. It was not a negative growth rate, but it was a slowdown. Today, we will be pleased if we achieve a growth rate of five per cent and an industrial of growth rate of 11 per cent.
A year ago when I warned that industrial growth rate was slowing down, people had laughed at me. Everyone spoke of the service sector and the agricultural sector. I am an industrialist and I spoke of the industrial slowdown. Nothing was done. Last year's Budget did nothing to kickstart (or whatever word you'd like to use) the economy. What could have been done is another issue, like we will have to see what can be done now. That was the problem with last year's Budget.
Reducing taxes ensures higher compliance. Still, the taxes collected were less. This was because the growth rate had declined.
Second, to be fair to Mr Chidambaram, there was tremendous politically uncertainty. We had two prime ministers and a general election. Political chaos hurts. It caused the guy not to buy that scooter. He will say "Hey hold on! I may as well as save the money, I don't know what will happen tomorrow, so I'll keep the money."
Another thing that hurt, in terms of fiscal deficit and government expenditure, was the Fifth Pay Commission. I believe that Mr Chidambaram was absolutely against any hikes in salaries. The government gave more than what was asked for. In this regard, it was a very weak Cabinet. With all due respect to former prime minister I K Gujral, he is gentleman. But he is a weak gentleman. Because of all these factors, the last budget did not work.
Regarding what will happen, I don't know because I don't have a crystal ball. But Mr Yashwant Sinha certainly faces a very tough task.
Sanctions are not a real worry. Immediately clear projects that have not been given permission for the past five, four, three, two years. We need foreign direct investment, especially in the infrastructure sector. That is the only thing you should do to fight sanctions. The Budget should not change because of the sanctions, which are only one per cent of the country's total GDP. The sanctions are not going to kill us, at least not for the next 12 months. After that, we'll see what happens. The sanctions will hurt, and we have to be ready for them. Till now, we don't know how much it will hurt, because no one is clear what exactly it means. Moreover, only the Japanese, the Americans and to some extent the Germans are really imposing tough sanctions. The French, British, Russians and the Arabs are not.
The task before the finance minister is very tough. He should ignore the question of sanctions, and clear projects like it did with the three power plants. There are so many works pending. The government should be either clear or not clear. In fact, this so-called swadeshi government should announce that it will clear many more projects than the so-called globalisation government of the United Front. The latter only talked.
We must remember that we are a continental economy like the US or China. The US doesn't live on exports. In its GDP, exports are not as important as they are for countries like Germany, Japan, and Hong Kong. We are similar to the US. We do need more FDI and exports to meet the balance of payments situation.
However, our economy can only be built if domestic funds are available, which have been stagnant for the last two years. The government has to increase capital expenditure in areas like ports, roads, power, and infrastructure. So how will the government fund all the extra expenditure given that revenues are stagnant or falling. So how does one get more funds without causing inflation or increasing the fiscal deficit?
I am not in favour of increasing the fiscal deficit or letting inflation rise. The inflation rate should remain below six per cent, preferably at five per cent.
Inflation hurts the poor and the fixed income earners the most, who account for 90 per cent of the population. Even industry will be affected if the rupee depreciates and import prices go up.
Similarly, the fiscal deficit should be brought down to four per cent over the long term. Industrialists want capital expenditure to increase, but knowing my politicians, they are likely to increase the fiscal deficit and use the resources on revenue expenditure, such as subsidies. I don't want to give my politicians that leeway.
Therefore, to raise resources, there are only two ways. Both are politically very tough decision, and it remains to seen which one is followed. One is to reduce subsidies, which will save the government a lot of money. I don't think the government will be able to do it. Subsidies in India have gone wrong. The poorest do need subsidies, but today, they go to the rich farmers instead. So target the subsidies better, and reduce them. But this is unlikely to happen.
The other way is to sell the public sector units. This way the government can release up to Rs 200 billion. One big worry about privatising is what will happen to the excess labour. This is a fair concern. India does not have a social welfare system, we just cannot sack employees and leave them on the streets. One way out is to make a condition that existing employees cannot be sacked for at least three years, unless of course on grounds of indiscipline or something similar.
The government can sell the PSU right away, or after making them profitable
to get a good price. Either way, the government should sell them off within 24 months, not after 10 years, because we have no time. No one is asking the government to privatise strategic and defence industries. Also, I am not in favour of privatising enterprises such as the Oil and Natural Gas Commission or the Indian Oil Company. But what is the government doing in areas of engineering, hotels, machine tools?
The best way to get a good price for the PSU is through the stock market route. I know it is not very easy -- we will have to study the experiences of other countries to see how they managed to privatise their public enterprises. Again, don't give the big units to a Bajaj or Birla or Tata, the small companies can be sold to them at a good price. Privatise the big units through the capital markets, so even if you are giving them away cheap, you are giving them away to millions of stockholders. If there are four million shareholders in Reliance, why can't there be five million in the PSUs?
This way, the government can raise revenue. Then, it can retire the debt which will bring down interest rates and also cut the fiscal deficit. This is the solution -- without increasing fiscal deficit, you can increase demand.
I don't want to set too many objectives. Just two: reduce the fiscal deficit. For 1998-99, the government can target five per cent of GDP, or even 4.5 per cent. Second, increase capital expenditure by selling the PSUs. The government must stop borrowing from the market. By doing so, the government has driven the private sector out, and this part of the reason for the present industrial slump.
As told to A K Diwanji