View Point
A politically adroit budget.

If there is one thing that makes Yashwant Sinha's 2001-02 budget stand out, it is the balance he has struck in addressing two opposing constituencies: political and economic. The smart market rally seen immediately after his speech bears testimony to the fact that he has got the broad positive message of reforms across - though the markets can be notoriously short-sighted when judging budgets. Remember the euphoria that greeted P Chidambaram's 'dream' budget?
Economists should be happy to see a finance minister actually hitting his fiscal deficit target, while giving enough indications that he is not finished with reforms. The dreaded P-word on privatisation was uttered with clarity, never mind Mamata Banerjee's efforts to head in the opposite direction with the railways. He has even pencilled in disinvestment proceeds of Rs.12,000 crore (recklessly, given past track record). A closer look suggests that this could be something of a political rope trick. Rs.7000 crore of this is to be devoted to providing restructuring assistance to troubled public sector undertakings. This should silence critics, but the catch is that there will be no Rs.7000 crore if there is no disinvestment. A smart political move.
Then there was the unambiguous message on downsizing government, uttered to growls of discontent from the opposition. But what Sinha has proposed is to restrict growth in new jobs to one per cent per annum, when the attrition rate is three per cent. So who can object to downsizing when government jobs will still remain open? Again, a good strategic balance. Then there was the howl of protest when he announced plans to relax the layoff provisions of the Industrial Disputes Act by exempting companies with fewer than 1000 workers. But he stilled this with adroit announcements about a safety net for displaced workers and a tripling of compensation for those handed the pink slip. Companies will also be freer to outsource production, for which the contract labour law is being amended. Once again, Sinha defanged the opposition by talking about 'protecting' their interests by legislating clauses on health and safety. Above all, he avoided doing anything on politically oversensitive areas like fertilizer subsidy.

In sum, what Sinha's budget does is rekindle the the 'feel-good' factor in the economy by getting his budget to make positive noises on reforms, scattering largesse in the direction of the markets, persisting with the simplification of indirect taxes, and the removal of most income tax surcharges - and all without throwing the fisc out of kilter. It is arguable whether this feel-good factor can last, but Sinha did a wonderful job by playing the right notes before the budget. By adopting the simple strategy of warning of tax mayhem in the budget, Sinha managed to drive expectations so low that the markets were moping at the bottom. The markets are happy today primarily because they were bracing for a death-blow, which, wonder of wonders, didn't land on their necks.

Of course, it would be entirely unfair to suggest that the budget was just an expert exercise in public mood management. On the contrary, thanks to the fact that we have had the same finance minister presenting the budget three times in a row, Sinha has brought in a level of consistency in budgetary objectives that has been unheard of since Manmohan Singh's times (if one were to exclude the Swadeshi budget that earned him the nickname of 'rollback Sinha'). The government is gradually reducing all exemptions in direct and indirect taxes, making tax administration more manageable and transparent. While a true shift to value-added tax is some years away in view of the sparse coverage of the services sector, the manufacturing sector is, by and large, moving inexorably in that direction. As Sinha pointed out, nearly 80 per cent of excisable goods are now covered by the 16 per cent Cenvat rate. As for customs, apart from the expected increase in duties to bound-levels in view of the planned removal of quantitative restrictions from 1 April, the general trend is towards lower tariffs. The removal of the import surcharge is a step towards this goal.

But before one gets the impression that God is in his heaven and all's right with the world, one should take a pause. The budget will fly or fail depending on whether the economy rebounds in 2001-02 or not. The budget talks about bringing the fiscal deficit down to 4.7 per cent without a major taxation effort. This can happen only if the economy grows faster than it did this year. The other issue has to do with the investment climate. While the lowering of interest rates, the tax sops for IPOs, incentives for infrastructure and tax holidays are good signals for investment, it is not clear how the saver will react. The biggest question-mark is about reforms: while Sinha made the right noises, legislating all the politically difficult laws - on contract labour and allowing companies to retrench easily - will call for steel nerves. There could be many a slip between the cup and the lip, with elections to state assemblies around the corner. One hopes Sinha's reformist zeal does not end up the way Manmohan Singh's did.

R Jagannathan