AND so the Finance Bill was passed on Thursday, April 22, by a special session of Parliament even though there was no government, effectively, at the time and the country heaved a sigh of relief. Thank god for small mercies!
For this was a Finance Bill that has many firsts to its credit. For the first time, Parliament was forced to be adjourned two days before the budget was to be debated. For the first time, the Finance Bill was passed without a discussion—though not without much acrimony on Wednesday. And one still doesn’t know whether this historic Budget will stand the test of time—the incumbent government will have the power to tinker with or even overturn it.
Perhaps also for the first time, corporate India is turning up its nose in disgust at the way political interests have overridden economic necessities for the fourth time in three years. "I wonder how many of the 543 legislators can differentiate between the Finance Bill and a vote on account. And for those who are economy-savvy, its even worse; they just don’t give a damn," says the managing director of a blue-chip Indian company. Adds the CEO of a top foreign institutional investor: "Each legislator, irrespective of the political party he/she belongs to, should be forced to go through a refresher course in basic economics before they are sworn in." In the absence of that, says Sub-odh Bhargava, chairman of Eicher Motors, the country has to pay a price for the irresponsibility. "The cost is in terms of demand and investment decisions, the cynicism it creates in people, and the loss of confidence among investors," he says.
Reflecting the despondency, the markets greeted the passage of the Budget with a 56 point drop in the BSE Sensex, which closed at 3408.7. But a section of industry remained hopeful. "Right now, the country is on the edge of a precipice. One firm toehold and we are on the home run. One slip and we go hurtling down," says a senior executive of UTI, in the belief that the economy will keep trotting now. Adds Amit Mitra, secretary general, FICCI: "About 80 per cent of those in the industry have a sense of indifference, but the remaining 20 per cent are extremely concerned and there is a unanimity over the budget. The unanimity over passing the Finance Bill is probably the biggest achievement of the century."
Overseas investors, however, would beg to differ greatly with Mitra. And in line with recent trends, the gloom seems deeper among non-resident Indian (NRIs) than among British investors. "Those who have not invested will not invest and those who have will want to come out," Shantoo Ruparell, a leading investment adviser in the NRI community, told Outlook. Investment in the financial market in India is likely to drop 70 to 80 per cent and if the government were at this stage to launch cash deposits, "they will not get even half a billion dollars", he sputtered. Faith in the government is down to about 10 per cent of what it was a year ago, measured in willingness to invest.
And he could be dead right. With foreign direct investment (FDI) coming to only 40 per cent of last year’s inflows, even some foreign investment banks are considering leaving India as there is not enough business to justify their presence. To quote columnist and BJP economist Jay Dubashi: "You can take economics out of politics, but you cannot take politics out of economics. And right now, it is all politics and very little economics."
The sudden political upheaval comes on top of more bad news on the economic front. There is fresh news of a Rs 7,921-crore deficit in revenue receipts for 1998-99. The surprise factor here is the Rs 3,442-crore shortfall in corporate tax collections. While expectations on the customs and excise fronts were poor due to the industrial slowdown, the government had all along maintained that corporate tax collections might marginally exceed the target. Even the customs and excise collections have been revised downwards.
GOING by this shortfall alone, the fiscal deficit for 1998-99 should amount to 5 per cent under the revised time series (seven per cent of the GDP under the old series). Worse, revenue deficit will touch an all-time high of 3.8 per cent of GDP, surpassing the previous record of 3.7 per cent in 1993-94. With dwindling exports, the cumulative trade deficit during April-February 1998-99 is up at $8.2 billion. Data from the Centre for Monitoring Indian Economy confirm that exports will be $33.5 billion compared to $34 billion last fiscal.
What hurts is that the blow comes just when Sinha’s budget had started bringing back the elusive "feel good" factor. Says Narendra Nagpal, head of research at UTI Securities: "This budget was a great psychological boost. The sops given to the mutual funds and the capital markets were not only bringing in the retail investor, they were leaving indelible impressions on the industrial climate as well. Sinha was hoping—and correctly—that the general upbeat mood in the capital markets would spur rapid industrial growth and thus contain the fiscal deficit."
The hope was quite demolished on that fateful Saturday. Says Indian Merchants’ Chambers president Y.P. Trivedi: "A pro-growth budget and a pro-exports exim policy have warmed the cockles of industry, but narrow political considerations seem to triumph over the country’s long-term economic interests." And the capital markets, which has taken the fall of the government pretty badly, will be even more sensitive to another rag-tag patchup with as much guarantee of holding together as a loose threading of beads.
Says V.V.L.N. Sastry, vice-president and head of equity research and investment banking, Khandwala Securities: "The markets are worried about the Left parties’ stance on public sector disinvestment. If the Left has to support a Congress-led government at the Centre, how will the balance work out?
Undoubtedly, the worst hit now will be mutual funds, with individuals losing faith in the economy and going back to bank deposits. Among them, the worst-hit will be UTI, whose revival package is penidng. Says Nagpal: "Companies planning investments will delay their decision, projects cleared by the Foreign Investment Promotion Board will fail to translate into FDI unless the political situation stabilises. Fiat was planning to put Rs 300 crore into its Pune plant and has since deferred the decision." Nagpal is also worried about the job scenario. "Post-budget, there was so much buoyancy that the job market appeared to be perked up. Now even that’ll dry up."
Agrees Michael Ashfield from the India Research Group in the UK that monitors investment into India: "People will delay investments, they will want to watch for a couple of weeks to see what the new government looks like." Following that, he said, there is likely to be a "second stage of waiting" while they find out what the new policies will be. Investors are impatient to speed up involvement in India "but it’s not getting any easier because the political situation is so uncertain". More changes are likely to come from the bottom up because the electorate is showing signs of dissatisfaction.But all this is asking investors to be very patient, he said.
GOOD news for overseas investors may be a long time to come with Parliament in hibernation, as the judicial and administrative reforms will hang fire. Says FICCI’s Mitra: "Some extremely important changes like the Bills on insurance, FEMA and money-laundering and amendments to the Companies Act, Income Tax Act and the Securities Contract Amendment Bill are probably some way off now. Also under a cloud is the fate of two major working groups proposed in the budget, one to rewrite the Industrial Development and Regulation Act and one to rewrite export regulations to bring in transparency in exports under the revenue secretary." A study by West Bengal chief minister Jyoti Basu on differential tax rates among states had been completed, according to Yashwant Sinha. He had also announced a fiscal correction programme to bail out all states badly affected by the Fifth Pay Commission. The future of these two statements, both in the interests of the Congress and its allies if they form government, will still be uncertain.
Of all these pending reforms, the fears are worst with regard to the Insurance Regulatory Authority Bill. This legislation, cleared with some changes by the standing Parliamentary committee on finance, was also okayed by the Cabinet and was one of the items on the business agenda of the budget session of Parliament. Now with a new government set to take charge at the Centre, with socialist allies, the bill faces a dark future. Says Kamesh Goyal of KPMG Peat Marwick: "The fall of the government will be a setback as all issues relating to the bill were finalised. There is already some shift in attention as China, as a part of its strategy to get into the WTO, has handed out quite a few insurance licences and has said that it will make the sector more attractive for foreign investment. Moreover, European insurers are now taking a fresh look within the European market for growth, following the introduction of the Euro." But the fact that the Parliamentary committee that cleared the bill was headed by a Congress MP, Murli Deora, had added to the confi-dence of prospective entrants that the Bill would be passed in its present form even if the Congress comes to power. Says Mitra: "This is very important for moulding the psychology of foreign investors as it’s a major entry point into the finance sector. No government will differ on its importance except the Left parties."
Even economists are afraid that the disinvestment process could get derailed and the subsidy bill may rise. Says an economist involved with the Planning Commission: "The subsidy bill going up will depend on how interim an arrangement it is for the incoming government. If it feels that the future is uncertain, there could be a tendency towards populism. This would be a serious setback to investment."
For now, global rating agencies like Standard and Poor’s have done their bit by not downgrading India’s sovereign credit standing further. But there is no saying what the future holds for this unfortunate economy. Says a dealer with a foreign bank: "Fresh concerns such as the progress of financial sector reforms or disinvestment seem to weighing on treasury managers. It is the near-certainty of general elections in the short term that is causing more concern, as it will certainly adversely affect fundamentals and further pressure the rupee. "
But more and more industrialists seem to be wanting that. Arvind Singhal, MD of KSA Technopak, seems to voice the concern of others: "It’s a myth that a poor country like India cannot afford elections, a myth spread by politicians scared of fresh polls. Everybody talks of the cost of elections. What about the cost of non-governance when the government lurches from crisis to crisis? That’s much more than the Rs 500 crore or so we spend on the elections." Sums up K.R. Bharat, managing director, Credit Suisse First Boston Securities India: "This is the crunch time for politicians. The legislators must realise that the economy should not be put in jeopardy every time there is a political crisis. It’s time they took responsibility for their actions." Points out Bhargava: "What we need right now is political and electoral reforms to bring in a stable structure so that we don’t land up with political emergencies like the current one."
An investment consultant with an American investment firm said fund managers are unlikely to get "too uncomfortable" about any "jitters that show up in the market index". But while investment might not take a sudden drop, "this will hardly encourage us to move in the direction of quicker growth". The passing of the budget indicates broad agreement on economic policy but investors are worried by the "disrupting power" of tiny groups in the coalition. Adds a banker in India: "If there was a Nobel Prize for economic insensitivity, our politicians would have won it for the last three years." No debates about that, surely.
With Sanjay Suri in London and Neerja Pawha Jetley & Arindam Mukherjee in Delhi