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Chidambaram's daunting budget exercise

The secondary and primary markets too will have to function in a vibrant manner, with fresh incentives for stimulating saving and investment.

THE CONGRESS Coalition Government, headed by Manmohan Singh, with a Cabinet of 68 members and P. Chidambaram in charge of the Finance Ministry, has a challenging task ahead, as entirely new policies will have to be formulated and implemented. The difficulties experienced earlier in finalising portfolios and formulating the Common Minimum Programme have given rise to apprehensions in industry, stock, money and forex market circles about the new Government being able to reconcile apparently conflicting objectives.

Though the accent will be mainly on revitalising the agriculture sector, improving the performance of small and tiny industries and implementing schemes that will generate employment among the weaker sections of the community, other measures also will have to adopted for augmenting the pool of resources and maintaining the tempo of growth in different segments of the economy witnessed in 2003-04. Both Dr. Manmohan Singh and Mr.Chidambaram have been keen to reassure FIIs, industrial organisations and others that the new policies will be investor friendly and the reform process will be carried forward with a human face.

The Finance Minister has explained to the representatives of FIIs, members of the stock exchanges and other financial institutions that the CMP by itself will not have any warping effect. Also, he made it clear that the new policy initiatives will be facilitating a larger inflow of foreign direct investments and that India will continue to be an attractive destination for FIIs. But Mr. Chidambaram's observations have not fully allayed the fears of FIIs and foreign interests. There is a desire to await fresh developments and the full Budget for 2004-05 in the first week of July. There may of course be some leeway as it is proposed to introduce a scheme or unearthing black money and assets. The last exercise was in 1998 which fetched Rs. 10,050 crores.

Bourses remain volatile

After the debacle in the bourses, when the BSE index slumped to 4227.50 on Black Monday (May 17), there was a smart recovery and the Sensex rose to 5058.55 on May 27. But two-sided movements have been witnessed in the past week and the gains have not been held and fresh selling by FIIs and others led to a sharp drop in this index to 4817.99 on June 3.

In Friday's session, volatile trading was again witnessed. After touching a low of 4759.35, the index recovered smartly towards the close to 4889 on encouraging reports from New Delhi. Though it is agreed that a friendly approach may be adopted by the Finance Minister, there is a disposition to await fresh developments in the coming weeks.

The heavy selling by FIIs in earlier sessions led also to a weakening of the rupee for a while. But with the decision of the Reserve Bank to meet the heavy demand for dollars, the rupee has been moving around to 45.30 a dollar latterly after touching a low level of 45.95 at one stage. The rush for meeting foreign exchange commitments and the outflow of funds on account of remittances by FIIs were responsible for a slight decline in forex reserves by $56 million to $118.57 billion during the week ended May 21. Subsequently, however the uptrend has resumed and forex reserves were higher by over $1.24 billion at $119.82 billion in the week ended May 28.

Since the banking system has high liquidity and there is no dearth of forex and rupee resources and it is also expected that the growth in GDP will again be 7.0-7.5 per cent in 2004-05, the Finance Minister can formulate the full Budget estimates without much difficulty. His task will be rendered much easier, as the budgetary position has improved significantly in 2003-04.

For the first time in recent years, gross tax revenues at Rs. 2,63,000 crores have exceeded the Budget estimate of Rs.2,49,315 crores. But even with a slight reduction in net tax revenues, the revenue deficit is lower at Rs.98,308 crores against Rs.1,12,292 crores and the fiscal deficit at Rs.1,25,960 crores against the Budget estimate of 1,53,637 crores. This improvement is also due to lower revenue expenditure.

In the expectation that the uptrend in revenues will remain in evidence and the outlook for the economy will continue to be promising, the former Finance Minister, Jaswant Singh, had prepared the Interim Budget estimates optimistically, in spite of the loss in tax revenues on account of the changes in excise and import duties effected in January this year. Credit has also been taken in the Interim Budget estimates for Rs.16,000 crores towards proceeds under the disinvestment programme, when computing capital receipts. Since any attempt to dilute government ownership in the PSEs upto 51 per cent can be made only after taking various aspects into consideration, there may not be any sizable credit from proceeds under the disinvestment programme in the full Budget.

It is, therefore, being speculated how the required larger allocations for subsidies, social welfare schemes and for implementing projects in the infrastructure and core sectors will be secured without imposing new levies, excepting the announcement of a cess on all taxes for funding literacy drive. As the Finance Minister also has emphasised that the provisions of the Fiscal Responsibility and Budget Management Act will be observed and even the revenue deficit will be wiped out in five years, it remains to be seen whether the liberal minded Finance Minister will provide the necessary sops for FDI and FIIs.

Entrepreneurs in the private sector should also be enabled to embark on modernisation, expansion and new schemes involving large capital outlays. The secondary and primary markets too will have to function in a vibrant manner, with fresh incentives for stimulating saving and investment. If forex reserves continue to rise and a high level of liquidity in the banking system is sustained, there can be a significant augmentation of the pool of resources, if an investor friendly approach is pursued, as averred by the Finance Minister.

Economy in good shape

The Finance Ministry will, understandably, be keen on deriving maximum benefit from the promising outlook for the current year. The monsoon is expected to behave satisfactorily in the current agricultural season. The uptrend in industrial output and the inflow of invisible receipts also are being sustained. This is evident from the fact that major industries are performing in an encouraging manner and a current account surplus is being reported for the third year in succession, in spite of an enlargement of the trade deficit to $13.36 billion in 2003-04 from $7.45 billion comparably.

P. A. Seshan

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