ECONOMY

OTHER STORY RELATED TO ECONOMY Interview: Yashwant Sinha

February 28 is a red letter day for all finance ministers. But this year Finance Minister Yashwant Sinha had most Indians seeing red that day. From middle-class housewives furious over the hike in LPG prices to high net worth industrialists frustrated at the absence of anticipated reforms, the first reaction to Sinha's fifth budget was of disappointment, disgust and dejection. A complete opposite of how the nation had greeted his previous budget exactly a year ago. "In one year, Sinha has transformed from the man who presented one of the best budgets to the man who also presented one of the worst budgets in recent times," laments economist Surjit Bhalla.

ECONOMY WHAT AILS THE ECONOMY Consumer demands are flagging... ...investment growth is falling.. ... and the government has no money to pep up the economy

Nobody is grudging the finance minister his failure to live up to the tall promises of the past. Rather, the complaint is that he has failed to see-and do-what seemed obvious to most. For the past one year, the economy has been battered by lacklustre consumer demand and stagnant investment. That, in turn, has impaired employment and income growth. A conventional way out would be to put more money into the pockets of the common man to drive demand and revive business sentiments through a mix of investment incentives and reforms. Sinha did neither. At least, not in enough measure to make an impact. The budget actually tries to take some money out of middle-class pockets, and has hurt business sentiment.

It's not that Sinha has done no good. But as Subodh Bhargava, chairman emeritus, Eicher, points out, "Most of the good news is promise while all the bad news is real." Some of the budget proposals on agriculture and infrastructure could be path-breaking in the long term, but the regressive tax measures would be damaging in the short term. "It's not a budget which would make one happy, but it is not all that bad," says Shitin Desai, vice-chairman, DSP Merrill Lynch. Ashok Leyland MD R. Seshasayee calls it a "low risk, low return effort". Then, of course, there is a perverse reason to be hopeful-Sinha's good budgets haven't resulted in as high a growth as the bad ones have. Only, Sinha needn't have relied on such luck.

-with Vivek Law

Personal Finance
Don't Save, Just Pay Tax

There is no love lost between the finance minister and the middle classes. In 2001, he had cut income-tax rates by about 4 percentage points and yet the middle class did not flock the markets and spend the tax savings. Yashwant Sinha's revenge: a double whammy of hike in tax rates and dilution of tax rebates (see table). "Instead of offering a combination of carrots and sticks, the finance minister has gone for stick and stick. That will neither help him nor the people," warns Bhalla. In the past, whenever tax rates have been raised, tax compliance has fallen. Sinha has a brave plan to collect Rs 42,524 crore from income tax in 2002-3, Rs 8,086 crore more than what he collected in 2001-2.

There is fear that the budget will act as a disincentive to save for people with annual taxable salary of over Rs 1.5 lakh. Changes in dividend tax policy could make mutual funds unattractive at a time when volatile stock markets should be driving small investor to mutual funds. "The fun has gone out of investing in mutual funds," says Anup Bagchi, CEO of ICICI Web Trade. ICICI CEO K.V. Kamath is "hugely disappointed" with imposition of service tax on insurance. But the biggest let down is that instead of catching the big fish currently out of the tax net-doctors, lawyers, shopkeepers-Sinha opted to burden existing taxpayers.

-Rohit Saran

Business Sentiments
Rocking an Unsteady Boat

ECONOMY II. SINHA'S PRESCRIPTIONS >Increase tax burden on middle class to raise revenues >Reduce non-food subsidies to control expenditure >Liberalise agriculture to generate rural demand >Make long-term commitments on infrastructure >Consolidate the reforms of Budget 2001 III. EXPERTS' DIAGNOSIS >Additional taxes will keep demand from rising > Low demand, sentiments will prevent investment > No quick results of rural and infrastructure reforms > The big promises of 2001 remain unfulfilled > Budget 2002 is a story of missed opportunities

Usually, industry captains and chamberheads are asked to rub Alladin's lamp and reveal their wish-list for the budget. This time round CII Director-General Tarun Das was asked an hour before the budget presentation what industry didn't want-what it feared the budget might contain. Das said that any increase in the surcharge on corporate tax, hike in personal income tax, taxing of dividend and tampering with the mutual funds structure would harm the sentiments. Almost all these fears found place in the budget.

Worse, the wish-list of the industry, ranging from the removal of the Minimum Alternate Tax to sops for the beleaguered manufacturing sector, weren't included. Naturally then, Dalal Street voted with its feet on the budget and the Sensex fell by 143.35 points on Thursday.

ECONOMY SINHA'S STOCK How the stock markets have reached to Sinha's budgets

This seems to be just the beginning. "The feel-good factor which had come about due to divestment has been lost with the restoration of dividend tax," says Vallabh Bhansali, CEI of Enam Financial.

"Sentiments drive investment. This budget is ruinous for sentiment." SURJIT BHALLA, President, Oxus Research

"Most of the good news is promise while all the bad news is real." Subodh Bhargava, Chairman Emeritus, Eicher

Add to this the effect of the dividend tax on mutual funds. Points out R.H. Patil, chairman, Clearing Corporation of India: "There is little advantage now for an investor to put his money into mutual funds vis-a-vis a bank deposit." Shailendra Bhandari, managing director of Prudential ICICI AMC, is hoping there is no flight of funds from mutual funds. Most experts expect the market to slide.

Companies and the capital market had expected the budget to spur stagnant demand and investment. The budget did neither. "The real issue is that demand has fallen. The budget does nothing to address this issue," says BPL Innovision Group Chairman Rajeev Chandrasekhar. Many see the budget as a story of lost opportunities. "The finance minister had the opportunity to do much more," says ICICI CEO K.V. Kamath. He says low inflation afforded a deeper interest rate cut. This would have acted as a catalyst for spending and could have been backed by lower borrowing costs for consumers and pushed demand.

Some hope the promised increase in spending in the rural sector is the silver lining. Adi Godrej, chairman and managing director of Godrej Consumer Products, believes the push for agriculture and rural development makes the budget "forward looking". Videocon International Chairman V. N. Dhoot hopes "the spending on rural infrastructure and slashing of the special excise duties will spur demand for consumer goods". Of course, the Union budget in its present form is also a tool for rekindling sentiment and hope. Sinha's fifth essay has simply crushed the sentiment and divested a large section of the economy of hope.

-V. Shankar Aiyar and Vivek Law