columnist is a senior economist at the macro modelling and
forecasting division of the National Council of Applied
Economic Research (NCAER). Since completing her doctorate at
the University of Surrey she has been tracking developments in
the Indian economy. She is editor of the "MacroTrack", NCAER's
quarterly update on the economy. |
Contrary to the expectations, Yashwant Sinha
presented an interesting budget. Given his fiscal and
political constraints, most people had expected a lot less.
The budget should help improve business sentiment and also
push up demand and growth in industry.
Indeed, the draft fulfilled two roles that a
budget in today's India needed. First, it formed part of the
long-term reform process that the finance minister outlined in
the first part of his speech.
This year's Economic
Survey had, for the first time, indicated areas that need to
be addressed and the long-term reforms that are required to
lead the Indian economy on a higher growth path. The reforms
relate to infrastructure, small-scale industry reservation,
labour etc. Though most of the changes the minister proposed
have to come through other bills, some steps such as those
relating to infrastructure and movement of food grains will be
put in place right away.
Second, the budget attempts
to increase aggregate demand. Currently, the economy is
suffering from slack aggregate demand manifested in low
capacity utilisation, slow growth of imports and production
and a sluggish growth in prices. As I have argued earlier in
this column, when demand is low, fiscal policy can be
expansionary without raising prices significantly.
budget has taken a much needed expansionary fiscal stance by
removing the 10% surcharge on corporate and personal income
tax. It has brought the marginal direct tax rate back to the
more rational rate of 30% (except for the 2% earthquake
surcharge). It has increased the credibility of the minister
who had promised, two years ago, that the surcharge was going
to be temporary.
Looking towards a better GDP growth
Reduction in the dividend tax from 20% to 10%,
tax exemption for primary issues and removal of the surcharge
should boost investment.
In fact, a study by the NCAER
shows that though the removal of the corporate surcharge will
reduce tax revenue receipts of the government in rupee terms,
as a percentage of GDP it can have a positive
If the business sector responds positively to
the minister's gesture and invests the amount that becomes
available to them by not having to pay the surcharge, GDP will
grow by 0.36%. In this event, fiscal deficit as a percentage
of GDP will reduce by 1.5%. Though there may by some increase
in prices, it is likely to be marginal as inflation may rise
by only about 0.2%.
Good aggregate demand
In addition to this, there will be an increased
spending impact of the removal of the surcharge on personal
income. Thus on the whole, aggregate demand is likely to be
boosted. In the current scenario, wherein we are witnessing a
slowdown in industrial growth coupled with low inflation in
manufacturing and food prices, this is a positive
Since not too much was expected from the budget
this may also help to improve business sentiment and so the
increase in investment demand could actually be higher than
the investible funds released from removal of the surcharge.
Other incentives for increasing demand have also been
offered. For instance, by increasing the interest repayment
exemption for housing loans to Rs1.5 lakh, housing and
construction is expected to get a boost.
reduction in the small savings rate by 1.5 per cent should
reduce interest rates in the economy. It may be expected that
RBI may respond by cutting the bank rate further (it had cut
the bank rate by 0.5 per cent recently). Thus this will reduce
the cost of capital for the Indian industry, a long-standing
Some loopholes too
But some important questions still remain
unanswered. One such question is how the government is going
to increase the preparedness of Indian agriculture for the new
regime when quantitative restrictions (QR) will be removed in
April under the WTO requirements.
The remedy, which Mr
Sinha has offered in the budget, is to increase the custom
duty on edible oils. This would provide relief to farmers
cultivating oil seeds. But clearly this is a short-term
solution. One hoped to see a more long-term strategy in
With opening up of markets, volatility in global
agricultural commodity prices will get transmitted to the
domestic market. In the transition period, producers can be
protected by higher custom duties but if the economy is to
move towards an internationally competitive agricultural
scenario, the government must have a longer-term policy frame.
Hopefully, the honourable minister will answer this question,
on which the livelihood of nearly 70% of the Indian population
depends, during the course of the year.
To view more articles by the
author, just type Patnaik in
the Keywords search and hit go!
Copyright © 2000
Sharekhan.com & SSKI Investor Services Pvt. Ltd. All
The views expressed in
this column are those of the author and not of the institution
to which she belongs. Also, Sharekhan may or may not concur
with the views of the author. We do not represent that it is
accurate or complete and it should not be relied upon as such.