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The Rediff Budget Special/Dr U Shankar

'Why should the private sector invest in public sector banks?'

The budget is much milder than what we had expected. Everybody expected a very harsh budget this time because of the Kargil war, the cyclone in Orissa and the sanctions.

But the finance minister has taken the view that the economy is moving well what with the GDP around 5.6 per cent, the stockmarket reviving, inflation rate low, exports' growth at 13 per cent, current account less than 1.8 per cent, foreign exchange reserves booming, software exports touching Rs 150 billion.

Sinha might have thought that if he tried to raise additional resources in the form of taxes, there would be a negative signal. His hope is that economy will grow and generate more tax revenues.

There are not many new taxes in the Budget. There is practically no tax on the corporate sector. There is only one small change in the personal income tax; surcharge raised from 8 per cent to 15 per cent for those who have an income of more than Rs 150,000. The dividend tax for the companies is raised from 10 per cent last year to 15 per cent.

As far as indirect tax is concerned, he wanted a single set of excise tax but he is also talking about some special taxes. He wants to have three rates in the transitional period.

He is under pressure to follow the WTO obligations. When India had agreed to remove many of quantitative restrictions by April 1, 2000 and the remaining by 2001, he has no choice but comply. So, he has opted for a 35 per cent peak customs duty.

But he has also given a number of incentives for the information technology industry, biotechnology and entertainment and it has come mostly in the form of reduction in the duty for the computers, CD-ROMs, mother boards, optical fibres, etc.

This will reduce the cost of production for the people in software and telecommunication industry and will generate growth.

There is going to be a net loss of Rs 6.50 billion in customs duty. So, the expected gain in revenue is not much. On the other hand, there is no cut in the expenditure side.

We expected a lot of decisions in downsizing the government and the power side. In fact, he has gone to the extent of announcing that the public sector banks will not be privatised.

This will have a very negative effect in terms of incentives, hardwork and profitability. What he said was, the government equity in banks will be reduced to 35 per cent. But the question is, why should the private sector invest in public sector banks? How is he going to achieve it politically?

Last year, we expected Rs 100 billion from divestments but what happened actually was just Rs 28 billion. Ideally, what he should do is there are Rs 3 trillion locked up in central and state governments in the form of public enterprises.

If he reduces this and uses it to return the public debt, the public debt will become smaller; the interest also will become smaller. Then, he will have more money available for the social sector, health services, education, water supply, etc.

He has not even drawn a time-table as far as public sector divestments is concerned.

There are some incentives for the rural sector like housing for those below a certain income, compulsory primary education, drinking water supply, etc. This is a welcome decision. He has raised the urea price by 15 per cent or so.

That is desirable even though there will be opposition. People use a lot of urea and less of potassium phosphate, and it is not good for the soil. We have to raise the price of urea as it has been kept at a level for a very long time.

But in the agricultural sector, we expected more incentives to encourage and boost export opportunities, marketing and development of infrastructure. There is nothing in the Budget on technology; he has talked only about credit.

If we encourage agro-based industries, it will provide more jobs in the rural sector. Unfortunately, it has to be dealt with by the state. Infrastructure is the bottleneck. There is nothing in the Budget for the power sector, roads, telecommunications, etc. You also have to invest more on railways, which is very crucial in India.

The main worry is the fiscal deficit. Two years back, he said he wanted to reduce the combined deficit of the central and state governments to 4 per cent. In 1991, it was 9.1 per cent and it came down to 6.5 per cent and now it has gone up by more than 1 per cent. Last year, out of Rs 880 billion, the government borrowed 67 per cent from the market. That means the private sector is competing with the private sector.

That will raise the cost of interest for the private sector. Another negative sign is the huge increase in the petroleum price. But nothing has been done to increase the production potential of crude oil in India.

On the whole, given the constraints, the finance minister has done a fairly good job. But he could have done much better by reducing the fiscal deficit and announcing a long-term plan for containing the size of the government.

Tamil Nadu particularly will benefit from the concessions in import duties and customs duties of items concerning information technology. There is a lot of potential for growth here because of the encouragement the FM has given for the venture capital funds not only in the field of information technology but in biotechnology and small-scale industries.

This will lead to a new generation of entrepreneurs. As far as attracting venture capital is concerned, Tamil Nadu has great potential.

In the infotech field, even though Bangalore is attracting a lot of publicity and investment, infrastructure is not very good there. Also, the quantity and quality of trained manpower is much higher in Tamil Nadu.

Although Tamil Nadu is a late starter, they are much more aggressive. They have the TANITECH University here mainly for the promotion of information technology.

Villages are also well connected here. So, here they are creating a local market apart from the export market, which is a very good sign. That is why recently, an international agency rated Tamil Nadu higher than Karnataka in the field of information technology!

Dr U Shankar, director, Madras School of Economics, spoke to Shobha Warrier in Madras

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