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S. Venkitaramanan

THE Union Budget has become a national ritual of political and economic significance. With the coming of live presentations of the Budget on TV channels, the statement of expenditure and revenue estimates has become a media sensation.

Is all the hype worth the while? Does the economy really react to what the Finance Minister reads out in his tryst with destiny? The market's reactions to even the most dynamic Budgets have been temperamental because they have already factored in expectations about the Budget. There is very little fizz left after the analysts tear the Budget to pieces. Will this be the case come February 28?

Mr Jaswant Singh has shown remarkable courage in making the Budget process more transparent, what with the mid-year review and the Kelkar Task Force reports. The Budget obviously is more than a mere compilation of accounts and estimates. It involves vision, a strategy and policy frame. But Mr Jaswant Singh's options are limited. His fiscal framework is likely to be extremely tight.

Our rough estimation shows that his fiscal deficit numbers for 2003-04 may be worse than those his predecessor unveiled for 2002-03. Of course, much depends on how effectively he can contain outlays on Defence, subsidies and general establishment.

Our fiscal fortunes will also depend on how successfully he extracts dividends from profitable PSUs. While divestment is important at Rs 10,000-12,000 crore, it is not critical to the size of the fiscal deficit.

Mr Jaswant Singh is likely to be besieged by pressures for increased outlays on food subsidies. While the abundant food stocks are good news, the provision of higher subsidies will still involve a fiscal hit. How far the Government will be able to resist pressures on this front will determine the final turnout of the deficit numbers.

Even more important is the size of Defence outlay. As the Indo-Pakistan relationship teeters on the edge of a crisis, the pressures for further increase in Defence outlays are likely to mount. Mr Jaswant Singh has to go with the flow and may yield to the pressures and persuasions of the Defence forces.

The inducements offered by Defence equipment suppliers from abroad in the form of forex credits give a superficial impression that Defence outlays do not impact the Budget in the sense of cash flows, but the fiscal deficit remains unaltered as the relief is covered by debt.

The weapons industry of the world is mounting pressure on New Delhi. The balancing of the pressures from South Block against the fiscal cautionary signals from North Block is a tough challenge. I suspect Mr Jaswant Singh will find it an easier option — and a patriotic sounding one — to provide for a higher Defence outlay and top it off with a patriotic exhortation in the speech.

The Prime Minister, and now the President, have called for an ambitious Plan to promote infrastructure and rural investment, in particular, and growth, in general. The Budget speech will be a target of criticism if it does not provide adequate funds for the Plan, both in the soft sectors and for infrastructure.

While the provision of adequate funds — which must be met from borrowals — for a larger plan is almost a foregone conclusion, the Finance Minister must at least lay down that the users of infrastructure must pay for the capital charges and the running expenses.

"No free power:" must be a clear mantra for all States that try to get power from newly-installed power sources at the Centre or State level. So too, recovery of adequate user charges must accompany the new investments that are now planned on roads, railways and ports sectors. The enforcement of such policy guidelines will make a real difference that will signify a reformist zeal to Mr Jaswant Singh's Budget.

What will Mr Jaswant Singh do on the Kelkar proposals? Reams of paper have been spent to analyse — and motivate — the Government's reactions to the Kelkar proposals. The proposals do represent a sincere effort at modifying the Indian tax system. But it is doubtful whether Mr Jaswant Singh will dare to upset many influential lobbies by accepting Kelkar proposals in full and following the big-bang approach.

Considering the kind of opposition the Kelkar proposals have generated, even among the "pro-reform" side of the political spectrum, it is doubtful whether all of Kelkar will go through. Hopefully, the capital market- friendly elements, such as exemption of dividends and equity-related capital gains from income-taxes, will find acceptance, at least from the point of view of making the Budget a platform for a stock market boom, transient though it may be.

Other elements of the Kelkar recommendations, such as the idea of bringing in NRIs' global income into the Indian tax net, need careful scrutiny. Its potential dangers are too obvious to discount. So, too, are Kelkar's proposals to interfere with existing concessions offered for exports. Will we see the time-honoured expedient of referring the Kelkar proposals to yet another Expert Committee?

The fate of the Kelkar suggestions on indirect taxes will depend on the response of the Government to the pleas of industry for greater protection. Whether the WTO-guided enthusiasm for reducing tariffs to Asian levels will win over the Indian industry's loud protestations for continued protection, albeit at a lower rate, remains to be seen. Mr Jaswant Singh may not walk the talk of Kelkar entirely, but tinker with it to help out the fortunes of India's beleaguered manufacturing industry.

Mr Jaswant Singh's proudest moments in his speech are likely to be when he points to the successes on the external front — the booming reserves, the likely current account surplus. He needs to be careful lest he be carried away by the signs of affluence.

The rising rupee is bound to make imports more attractive and local industry feel more threatened. While it is all right to lecture industry on higher productivity as a cure, the process of providing adequate, affordable and enabling infrastructure and governance is still a long way off.

The Budget will, no doubt, address concerns in regard to the financial sector — the rising level of NPAs and the need to prevent new scams. The Finance Minister will devote attention to the various follow-up actions he has taken on the JPC report on the latest scam. He will also cover the steps taken on the special legislation empowering banks and creditors to take over defaulters' assets.

While this is an essential step to making the financial sector healthy, much still remains to be done in making the lenders less risk-averse and more friendly to entrepreneurship. While due care has to be taken to avoid fraud and malfeasance, genuine enterprise has to be encouraged.

The present tendency of bankers to hide behind the alibi of procedures has to be contained. Vibrant banking has to be encouraged and placed on a proper pedestal if the economy is to revive.

The Finance Minister has many constituencies to please. First and foremost, he has to satisfy his political constituents — the members of the National Democratic Alliance, including their supporters in the States. Populist pressures will naturally loom large in the perspective of this constituency, what with the dates of polls getting nearer.

Another constituency he has to satisfy is that of multilateral agencies, which hold a watching brief over our economy. While fortunately we are not dependent on their mercies at the present juncture, we still need to keep in mind their counsel, wise or otherwise, in favour of fiscal austerity and debt to GDP ratio remaining under control.

The constituency of foreign investors is yet another important group to which Mr Singh has to devote attention. Foreign investors' confidence in India is important for our stock markets and our reserve levels. The Finance Minister's task is a difficult one, with the economy not growing at a good enough rate to help revenues grow. He has conflicting objectives — to keep Government outlays on subsidies and Central Plan high to satisfy his coalition allies as well as to keep Defence expenditure high to meet threat perceptions.

Mr Jaswant Singh cannot tinker with the tax code too radically lest he alienate the middle-class and the investors. He has to raise revenues without appearing to hurt the tax-payer — an impossible task! Ultimately, whether the Budget will be a beacon of hope for the millions of Indians — the poor, the deprived and the dispossessed — will be the touchstone of Mr Jaswant Singh's success. The size of fiscal deficit, the response to Kelkar proposals, the dimension of forex reserves — all these are mere tools.

What matters is whether Mr Jaswant Singh's Budget will waken the sleeping beauty that is India and usher in a new tomorrow, which will help banish hunger, poverty and deprivation. I guess that this Budget will not be one that will answer this ambitious description. It may neither enthuse the investors nor comfort the masses.

But let us wait and see, and hope that on February 28 our fears will turn out to be liars and our hopes will not be dupes.

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