SUNS4371 Wednesday 10 February 1999

India: Financial jugglery instead of sound policies

New Delhi, Feb 9 (IPS/Dev Raj) -- Will Yashwant Sinha end up mortgaging India's gold reserves again? He did it eight years ago the last time he was finance minister.

Sinha seems to have little luck. The government's economic think tank, the National Council of Applied Economic Research (NCAER) has just revealed that the deficit in fiscal 1998-99 is going to be worse than
in 1990-91.

"The ability of the government to intervene in the economy and provide a growth impetus to industry is severely limited by the fiscal situation," the NCAER warned in its latest official bulletin.

Continuing industrial slow down, high inflation, and spiralling fiscal and trade deficits loom over the budget Sinha will present in Parliament on Feb. 27 sparking fears that history is about to repeat itself.

There are differences however in the two situations. If India was then faced with a crippling oil import bill in the aftermath of the Gulf war, this time around international oil prices are actually crashing.

And if international banks had cut off loans to meet capital adequacy norms in 1990-91, loans are now scarce because of international sanctions imposed on India following the nuclear tests carried out by the Indian government led by the right-wing Hindu Bharatiya Janata Party (BJP).

According to former Reserve Bank of India (RBI) governor, C. Rangarajan, what was significant was that the crisis in 1991 set the stage for major reforms in trade and industrial policies.

"A medium term process of fiscal consolidation was then initiated under a tight monetary policy regime and for the first time core sectors of the economy were thrown open for foreign direct investment beyond 51%,"
Rangarajan said.

The trick worked. India's debt-to-GDP ratio declined steadily and by March 1998 foreign reserves were comfortable at $29.4 billion. But that was exactly when the present government decided to carry out what
proved to be costly nuclear tests.

Finance secretary Vijay Kelkar has already admitted that the gross deficit cannot be contained at 5.6% of GDP as promised. Conservative estimates now place the likely figure at 6.6% or about $25 billion by
the time the budget is presented.

According to NCAER, India's trade deficit may cross a staggering 5% of GDP this year since exports have lagged far behind imports thanks to the general downturn in global trade and the Asian crisis.

Assuming a 2% growth in exports and 6% growth in imports (Sinha warns of heavier customs duties), the deficit will still grow from $16.3 billion in 1997-98 to $18.6 billion in 1998-99.

"The projected current account deficit of $8.8 billion will cross the prudent threshold upper limit of two percent of GDP and would be the largest since 1990-91," NCAER warned.

Anxious to avoid that situation, Sinha has been trying to rob Peter to pay Paul. Earlier this month he tried to save $850 million by cutting foodgrain subsidies for the poor but angry regional partners quickly forced an embarrassing restoration.

Stiff opposition from cabinet colleagues in concerned ministries have also forced Sinha to abandon plans to dispose off, cheaply, government shares in steel, oil, mines and an automobile company jointly owned by
the Japanese Suzuki.

Said Petroleum Minister V. Ramamurthy, "I cannot allow the sale of Indian Oil Corporation (IOC) shares - the capital came from the hard-earned money of Indians."

But according to Sitaram Yechuri, a senior leader of the Marxist Communist Party of India (CPI-M), the people are being cheated of a saving of five billion dollars accruing from a recent fall in international oil prices.

The CPI-M was a partner in the previous United Front government which had decided that since hikes in prices of imported petroleum were passed on to consumers, so must reductions.

"We will challenge in Parliament such blatant and illegal diversion of money belonging to the people to cover deficits which were caused by financial mismanagement in the first place," Yechuri said.

Sinha's financial jugglery reached absurd limits when he ordered profit-making public sector oil companies to sell shares to each other and pass the proceeds on to the government after his privatisation attempts flopped.

"The PSUs have handed over $1.8 billion to the government at the cost of urgent modernisation plans including those meant to improve product quality and provide cleaner, environment-friendly, automobile fuels," Yechuri said. Cash-strapped though it is, the right-wing government refuses to grasp the nettle of increasing taxes on the rich or even widening the tax base. Currently less than 2% of Indians pay income tax
and direct taxes account for only 10% of GDP.

At a recent meeting of well-heeled members of the powerful Federation of Indian Chambers of Commerce and Industry (FICCI) Sinha virtually guaranteed that there would be no increase in tax rates.

Reacting, Yechuri said, "This government, which represents the ruling elite, is now producing a budget guaranteed to further mortgage the economy on the one hand and burden the common people on the other."