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BUDGET & FINANCIAL SECTOR REFORM

AMIDST THE WELL-PUBLICISED emphasis on agriculture and the social sector, the recent budget, which was the first official economic policy foray of the United Progressive Alliance Government, holds important messages for the financial sector and clues to its reform, or rather liberalisation, agenda. In fact, the stock markets look to such reform signals as much as to fiscal measures while reacting to the budget. This time touched to the quick by the one controversial budget proposal, the turnover tax, the market failed to appreciate the finer points of the budget, including those having a bearing on the reform agenda. The downplaying of the public sector disinvestment programme — the Finance Minister, P. Chidambaram, has budgeted for just Rs.4, 000 crores, a fourth of what the interim budget had done — might indicate a slowdown in one area of reform. However, in his budget speech Mr. Chidambaram has recognised both disinvestment and privatisation as useful economic tools. A recognition that the top-rung public sector enterprises should function profitably in a competitive global economy suggests that badly needed reform measures in government-owned enterprises are under way. Even in the more conventional sectors covered by the budget, the liberalisation agenda is visible.

For instance, the Government has projected a market borrowing of almost Rs.150,000 crores this year. The efficiency of the financial system matters a great deal in mobilising such massive amounts and in keeping the costs down. The latter depends critically on the interest rate policy, which although primarily the domain of the Reserve Bank of India is influenced by the budget. On the eve of the budget, market interest rates were tending to harden and with inflation hovering around 6 per cent, it was widely believed that the soft phase of the interest rate cycle was finally over. The Finance Minister, while acknowledging the major cost savings that have accrued to the Central Government and other borrowers as a result of the prevailing soft interest rates, has pleaded for "a benign interest rate regime that appropriately balances the legitimate claims of the savers and the borrowers." While not giving any fresh insight into the continuing interest rate policy dilemma, Mr. Chidambaram, like his recent predecessors, has preferred interest rates to be aligned to the market, save for one or two exceptions. While the existing administered interest rates on small savings, PPF and a few others have been left untouched, the budget has fulfilled a promise made in the interim exercise: a new risk-free instrument that will deliver a slightly higher-than-market return for the exclusive benefit of the senior citizens.

A few, strictly non-budget initiatives having a direct bearing on the financial sector found mention in the Finance Minister's speech. Infrastructure funding gets a new thrust through the revival of an old mechanism: an inter-institutional group made up of leading development finance institutions and commercial banks will plough as much as Rs.40,000 crores into eligible projects. The proposal has a number of merits. It makes available relatively low-cost bank funds to those who have the expertise to invest in such projects. Just days before the budget presentation, the Government announced a major revamp of agricultural credit, promising to double its quantum in the next three years. The success of both initiatives depends on the pursuit of financial sector reform. The budget has promised a number of initiatives in this area, notably reform of the co-operative sector for improving agricultural credit delivery and tightening of the recently enacted securitisation legislation to help banks.

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