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India’s budget 2000 is nothing more than loud noises, lackluster and
without direction. Finance MinisterYashwant Sinha unfolded his you-win-some,
you-lose-some budget recently. Tax the rich, sop the poor,
impose levies on industry and trade and give a major thrust to the
rural economy through over emphasis on agriculture and allied
activities. He has shown the much-needed courage to slash the
ever-expanding food and fertilizer subsidy, increase defense
spending to meet post-Kargil requirement and step up grants to the
states.
However, it has failed to evolve a
co-relation between the country’s two major concerns, which
would propel it into being an economic power and a favorable
investment destination.
One - capping fiscal deficit which stands at a dangerous 5.6 per
cent of the Gross Domestic Produce (within 10 months of the
current fiscal, the government has already borrowed more than 80
per cent of its mandatory quota from scheduled banks amounting to
Rs 1,08,898 crores. Two
- stabilizing and giving an impetus to the agriculture sector
which sadly continues to be dependent on monsoon for growth.
Additionally, the subsidization of electricity through under pricing
continues and there are no signals given about the privatization of electricity. There is no timetable for further
privatization, including disinvestments, of state-owned enterprises
and the commitment in principle to reducing the state ownership to
33 per cent in the nationalized banks and to 26 per cent in all
non-security related enterprises. That the budget earmarks only 10
per cent proceeds from Public Sector Undertakings (PSU) share
sales to debt reduction. How can the Finance Minister then hope to
achieve a growth rate of 7 to 8 pre cent?
Chairman of the India-US Business Council and former Ambassador to India,
Frank Wisner is of the view that the budget does not have any
measures that show India can achieve a 7 to 8 per cent growth
rate. While it is forthright on the principle of fiscal reforms,
reducing deficit and privatization, there is no clear strategy to
bring in foreign investments. One can assume that the fiscal
deficit will remain high as a result.
Predictably, the markets gave a thumb-down signal with the
sensex crashing, and industry expressed its disappointment and
dubbed it as a sell out to the MNCs. But the multinational
corporations, while welcoming the budget, assert that there is
nothing in it that unduly favors them. Some of these MNCs,
especially in the soft-drink sector, are not happy with it.
Clearly, India seems to be banking on the phenomenal growth in the IT
sector with blessings from the multinational corporations which
leads to the current excitement.
India’s money manager highlighted telecommunications,
because “in order to become an economic superpower, we must get
connected, domestically and globally,” entertainment “an area
of great promise,” and knowledge.
All three are parts of the “convergence revolution” for India to
become an economic superpower on the basis of the capabilities
that Indian companies are showing. Toward this end, the custom
duties have been slashed from 40 per cent to 35 per cent. In the
case of computers, the duty has been slashed for computer
components and not on the complete product in tune with the WTO
provisions whereas the duty on IT products is to be brought down
to zero. For instance, customs duty on computers, motherboards,
and floppy diskettes has been reduced from 20 to 15 per cent, and
the 5 per cent customs duty has been removed from microprocessors
for computers, data graphic display tubes for colors monitors,
memory storage devices CDs, and integrated circuits and
micro-assemblies.
Also the tax on software exports would not be applicable to companies
that operate out of Export Promotion Zones and Software Technology
Parks. Such companies would be exempt from the tax, if they had
been established before April 1, 2000. Companies that came up
after this date would have 20 per cent more coming into the net
every year for the next four years.
Not surprising that IT stocks on the market zoomed toward the circuit
breaker. Software exports had grown phenomenally from Rs 1,500
crore in 1994-95 to Rs 10,900 crore in 1998-99. Nasscom predicts
that by 2001-02 that figure will leap to Rs 43,000 crore.
According to latest figures, the software industry is expected to record
a growth of approximately 60 per cent in the current financial
year. As per estimates of the National Association of Software and
Services Companies (NASSCOM), the software is projected to fetch $
8.85 billion out of which software exports will bring $ 6.32
billion and domestic sales $ 2.53 billion. Thus India is likely to
grow twenty times its current size to $ 100 billion by 2010. What
have come to aid of the country’s software industry are new
avenues of growth such as e-commerce and IT-enabled services which
are expected to account for almost 16 per cent of the export
revenues generated in the second half of 1999. Also, nearly 104 of
the fortune 500 companies, which had relied on Indian companies
for Y2K software, are now coming back for other work. Computer
Science Prof. Michael Destrouzos of MIT, who was in Delhi recently
for the IT Asia 2000, has projected that India could earn trillion
dollars annually from sale of information work alone in the near
future. IT and related business will form a significant part of
the country’s GDP in the next few years and IT-enabled services
will grow the fastest.
Apart from this, the foreign institutional investors have been allowed to
raise their portfolio investments from 35 to 40 per cent in an
individual firm. Also the new norms announced in the budget for
Venture Capital Funds may be a step forward. Especially, the pass
through parking instrument status for VCFs with the income free of
tax. But the 20 per cent tax proposed on distributed and
undistributed income instead of the 10 per cent on long-term
capital gains earlier would be a damper. As many VCFs are foreign.
If they pay 22 per cent tax on distribution of income it will
amount to levy of tax indirectly on the contributors, who
otherwise, are not liable to pay tax in India. A flat rate of 20
per cent tax would mean that most of them are taxed at a higher
rate. This is bound to turn them off.
Except for this there is not much in the budget, which favors the
multinational corporations. In general terms while the excise duty
has been rationalized and is on the higher side, custom duties
have also been raised. Thus, the multinational corporations
operating in India will have to pay the same excise duty as any
other Indian company while increase in excise duty on a large
number of consumer items which have been brought on the open list
will make the foreign goods expensive for India and protect the
domestic industry to that extent. In fact, customs duty on
essential items like wheat, rice and edible oil has also been
raised which will ultimately protect the Indian agriculture for at
least one more year. The US Business Council also felt that items
that had previously been covered by quantitative restrictions have
been put under the combined peak tariff of nearly 45 per cent
which is very high.
However, since India is a signatory to WTO, the country will have to
dismantle its import barriers to the extent as stipulated in the
WTO and as per the timetable laid by it. In spite of all this
buoyancy in the stock market, the country had not only failed to
lure substantial funds from abroad but their inflow is now on the
decline for want of adequate regulatory mechanism and transparent
policy guidelines. According to a UN report on trade and
development, both approvals (Rs 308.16 billion) and actual inflow
(Rs 133.26 billion) fell considerably in 1998 compared to the
previous year. Even the actual inflow in the first six months of
the current year, witnessed a deceleration and the country’s
expected mobilization of $10
billion worth of Foreign Direct Investment by the turn of the
century stands a distant dream. The capital inflow in the form of
FDI is less than two per cent in India compared to what the other
developing countries get every year.
India has fallen off the list of top ten investment destinations
preferred by the world’s 1,000 largest corporations. According
to the annual FDI Confidence survey conducted by the global
management consultancy AT Kearney, India ranked 11th in
January 2000 falling off the sixth place it occupied six months
ago. This is despite the fact that its actual score has increased
from 107 to 114 but remains low for the size of the country (less
than 1 per cent of GDP for all years since 1991). According to AT
Kearney, the drop in economic growth from just under 7 per cent to
just over 5 per cent in the past three years suggests that the
economic reforms started in 1991 have run out of steam.
According to the findings, the Vajpayee government is struggling to
attract FDI to stimulate the economy. CEOs do not seem to be
convinced of the new government’s ability to implement fast and
effective reforms. “Although investors are generally more
bullish about India than they were six months ago, the fall in the
relative ratings means the money is more likely to go
elsewhere.”
However, even though the country has failed on the index, it remains
attractive. The obstacles preventing the conversion of intention
into action are cited as poor infrastructure (cited by 56 per cent
of the respondents) followed by lack of transparency and political
instability.
While these results cast doubt on India’s current likelihood to any
substantially increased FDI, the expectation is that the country
will continue to attract the attention of global majors by virtue
of its perceived long-term market potential. At present, the most
attractive sectors for investment in India, according to a survey,
are insurance, retail, and telecommunications.
The US is already the largest investor in 19 sectors of the Indian
economy while Indo-US trade has jumped by 120 per cent between
1991and 1998. US companies have shown tremendous interest in
India’s environment market growing at a rate of 15 per cent
annually, which has a potential for pollution control equipment
worth $ 2.5 billion. There are also substantial opportunities for
US firms in the oil and gas sector, construction, engineering,
metal working machinery, sporting goods, education service,
cosmetics, airports, medical, water resources, food processing and
packing and mining sectors.
The US Export Import (Exim Bank) Chairman Zames Harmon confessed that the
bank has “under-invested” in India. Of the $58 billion loans
and guarantees world-wide, only $1.8 billion is invested in India
compared to $6 billion in China, $3.5 billion in Indonesia and $3
billion in Korea.
Although the US is India’s largest trading partner with a two-way trade
worth $10.7 billion, India ranks 33rd on the list of
countries to which the US exports, though they still account for
12.8 per cent of India’s non-oil imports.
While 18.9 per cent of India’s exports are destined for
the US, the US trade turnover with India constitutes a paltry 0.84
per cent of its global trade and its share in total US exports is
0.53 per cent.
The one positive element for India is that it currently enjoys a trade
surplus of 4.6 billion with the US, its exports amounting to $7.1
billion and imports totaling $3.6 billion. The US remains the
dominant investor in India in terms of Foreign Direct Investment (FDI)
approvals, actual inflows and portfolio investments. Between
India’s launch of its economic reforms in 1991 and last
November, FDI from the US totaled $2.26 billion while the US FDI
approvals amounted to $13.11 billion. Major sectors in India
attracting US investments are power, oil, refinery,
telecommunications, chemical & metallurgical industries, and
services.
India’s exports to the US comprise primarily of cut and polished
diamonds, textiles and ready-made garments, shrimp and prawns,
carpets, footwear and leather products, cashew nuts, dyes, iron
and steel products, machinery, chemicals, edible fruit and nuts,
spices, coffee and tea. The
first six items comprise 75 per cent of the overall exports. The
chief imports from the US are machinery, aircraft and aeronautical
equipment, chemicals and ferrous waste scrap. India’s placement
of over 1,400 items ranging from consumer goods to agricultural
products on the free list of imports from 1st April is
anticipated to boost bilateral trade.
In the food-processing sector, India could gain US technology and
know-how in distribution, handling and storage. The US exports in
India include orange and grape juices and fresh apples and soon
pears and citrus fruits. Besides, US food processing plants of
300-400 tonne capacity per day could be imported cheaply by India.
The US is also the leader in post harvest material and produce
handling like the hydro systems technology from which India can
profit. The US can help India in seed technology and cultivation
for improving yields.
But the 16 per cent excise imposed in this budget will tax food
processing at every stage such as processing and packaging thus
negating the effect. Coupled with the stiff sales tax and octroi,
the burden can render our agro-industry highly non-competitive.
Thus the claim of the budget that the economy is on the right
track is possibly not quite correct. From India’s stand point,
its economic reforms may be proceeding apace, but the world is
changing rapidly and the need for all nations to integrate
themselves into a global economy cannot be overemphasized. It will
take more than a mild budget to put things on track.
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