Search the Internet          Tips  Sites: Finance, Investment

Reform budget seen, but may not be enough

Giri Venkatesan in Bombay

As the Indian government enters the home stretch ahead of its national budget, the signals are pointing to a new wave of economic reforms to revive flagging economic growth.

But analysts fear the February 28 budget may not be radical enough to revive growth and lure back foreign investors deterred by red tape in the heavily state-run economy.

Finance Minister Yashwant Sinha told business leaders this week they would not be disappointed by his direct tax package, fuelling hopes he might reform the Byzantine tax structure.

He said there was no need to interfere with direct tax rates, but suggested he would tackle India's myriad tax exemptions.

The government has also been taking tentative steps towards selling stakes in state-run companies, encouraging those who believe the budget will usher in a new wave of reforms.

"The economy is slowing and he (Sinha) has to address this issue so this could well be a novel and pathbreaking budget," said Arun Goyal, an independent economic analyst.

Jury out

So far, though the jury is out on how far the reform-minded Sinha will be able to go in boosting the economy, expected to grow by 6 per cent in 2000-01, down from 6.4 per cent a year earlier and 6.6 per cent in 1998-99.

Though good compared to global trends, the growth rate is below an average of more than 7.5 per cent hit for three straight years in the mid-1990s and far off the 10 per cent rate economists say is required to meet the needs of India's one-billion population.

Along with the fall in growth has come a steady decline in foreign direct investment, seen at just $2.0 billion for 2000-01, compared to $3.56 billion in 1997-98, according to the Centre for Monitoring the Indian Economy.

"As far as the economy is concerned, the real problem is investment. There is simply no flow of foreign investment into the country today," former finance minister P Chidambaram wrote in the latest issue of Business Today magazine.

But signals so far on how ready the government is for radical and unpopular reforms have been mixed.

This week it shied way from a full privatisation of carmaker Maruti, opting instead for the sale of an unspecified stake via a rights issue meant to raise fresh capital for the firm.

Locked away

More than Rs 2.3 trillion are locked in state-owned firms and a new wave of privatisations would allow the government to cut debt which currently eats up 30 per cent of annual government revenues in interest payments.

But such liberalisation is also opposed by unions and by some politicians who, used to many decades of state control of key industries, still retain a strong distrust of the private sector.

In a sign of the contradictory forces at work, Commerce and Industry Minister Murasoli Maran promised laws on Thursday to protect India against any surge in imports when it drops quantitative restrictions on 714 items in April.

It is obliged to drop these restrictions under a World Trade Organisation agreement.

Complicating the entire picture is the uncertainty created by last month's devastating earthquake which killed more than 30,000 people in Gujarat.

No big impact

Economists say they do not see any significant impact on the overall economy from the quake.

Central bank head Bimal Jalan also said on Thursday he did not see any adverse medium or longer-term impact.

But what is unclear is whether the government will use the quake as an excuse to push forward unpopular reforms -- just as it rushed through a 2 per cent surcharge on all income to pay for reconstruction costs.

"For example, railway passenger fares are heavily subsidised and the railway minister has been resisting an increase in fares. We might see that kind of resistance being overcome," said Tarun Das, secretary general of the Confederation of Indian Industry.

There are also hopes that the budget will reduce the 11 per cent administered rate on small savings accounts, which would pave the way for lower bank deposit and lending rates.

Analysts also hope the Reserve Bank of India will lend a hand in Sinha's bid for growth by lowering the benchmark bank rate, currently at 8 per cent, although this falls outside the budget. But pitched against that is an inflation rate running at over 8 per cent.

Tell us what you think of this report