• MARCH 2, 2002

Budget '03: From zero to hero

It was a week of gyrations. In the run up to the budget, and probably more on speculative activity, the markets continued their February rally. However, the budget, on first hearing, stirred negative sentiment among investors resulting in a free fall of indexes. Precipitating the slide could be the 'buy on rumours sell on facts' faction.

With the advantage of hindsight, though many conjectured likewise pre-budget, the Finance Minister along with the administrative ministries did cheery pick announcements -- industry reforms -- resulting in pre-budget euphoria. Therefore, to expect the party not to stop was probably expecting too much. The build up in expectations is likely to have resulted in the post budget disappointment. Not to mention, that besides no more sentiment boosting measures, the Finance Minister rolled out some hard measures on the individual tax assessee, which spoilt the initial taste.

As mentioned earlier, with much of the industry reforms package announced pre-budget, the Finance Minister followed up with tightening the loose bolts. Lower imports duty to make domestic industry more competitive, which is not be taken with a pinch of salt. Peak import duty, as indicated by the FM, will be reduced to 20% over the next two years. Consequently, there is likely to be a 5% reduction every year. A point to note is that the Rupee depreciates at an average annual rate of 5%. This rate probably has increased in the past two years. Depreciation automatically makes imports unattractive. A five-percentage point reduction in import tariffs is likely to result in a lower percentage decline in dollar costs, as compared to the percentage rise in dollar exchange rate, which could preempt a fall in Rupee import costs.

Therefore, the fear of imports may not be entirely justified. Further, the FM has focused on building infrastructure. Increased growth in these sectors (power, roads, ports, airports, housing, telecom) will have a multiplier effect on the economy. Having said that, one, is to talk of reforms and the other is to walk on reforms. An argument in defence of the FM is that the broad policy has been announcement and implementation is now a state issue. FM can only encourage, but if one elected the wrong party to the state assembly, one is to blame…

At the individual level, a lot has been featured in the media. The FM has come down quite harsh on the individual assessee. There are two schools of thought. In FY02, the centre missed its revenue target by an estimated Rs 200 bn. These measures have been enacted to boost the Government's kitty to meet expenditure, which has not overshot targets over the past two years. On the other hand, meeting expenditure targets does not mean more inefficiency cannot be cut. Books can be balanced by also cutting expenditure. It seems the FM has taken the easier route of burdening the taxpayer. That said, there seems to be a silver lining on the horizon. As reported widely, Budget '02-'03 was the penultimate budget before general elections. Therefore, Budget '03-'04 is likely to be populist oriented considering memory span of the average Indian. Having forgotten the pain of fiscal '03 and the relief given in FY04, one can reasonably guess, the card the FM is playing.

Having a night to sleep over the budget, investors seem to have re-examined the pronouncements. The verdict seems to be reflected on Friday's trading session. The BSE Sensex gained more than a hundred points. Time and again, and although clichéd, one cannot help thinking of the statement -- if (a big one) one can keep his/her head while others are losing theirs beating the street is easy.

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