Sucheta Dalal :Before the budget a few policy signals
Sucheta Dalal

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Before the budget, a few policy signals  

Jun 21, 2004

By Sucheta Dalal

Finance Minister P. Chidambaram has taken a leaf out of his predecessor’s book by announcing several major policy initiatives ahead of his budget. Many of these initiatives, which faithfully follow the Common Minimum Programme of the United Progressive Alliance (UPA), are probably aimed at softening the Congress allies ahead of the budget and ensuring that his populist actions are not lost in the mass of budget proposals and reforms.

The policy package for the farm sector, announced last Friday, which aims to increase credit flow to farmers by Rs 30,000 crore is one such measure. The finance minister also seems to have obtained pre-budget consensus from state governments on the rollout of value added tax (VAT) in 2005. This could be another big development if state governments succeed in pushing it past the vested interests in their territories. Similarly, states have also been sounded on the possibility of imposing service tax on a wider net of services by offering a new sharing formula. Time will tell whether this merely hikes the cost of various utility services and punishes the same individuals with higher taxes; or brings new people into the indirect tax net.

The bigger questions is whether Chidambaram’s pre-budget efforts and announcements will lead to another ‘dream budget’? Market expectations from the FM, at the retail investor level are sky-high and it seems impossible for anyone to meet them, especially in his peculiar political and economic situation. What is sustaining investor expectations is a silly theory on the market grapevine that the Congress government has a ‘quiet understanding’ with the communist parties; that the Left parties will openly criticise the government on various decisions, but do nothing to rock the boat through sustained protest or by forcing a rollback. They point to the hike in petroleum, LPG and coal prices and the appointment of Montek Singh Ahluwalia as examples of this understanding in operations. All the noise and fury hasn’t made any different to government decisions.

As opposed to this naive view, institutional investors are far more discerning and worried. They don’t like the noises emanating from various ministries and are not amused at the media-hogging antics of Laloo Prasad Yadav. The prospect of the mammoth and beleaguered Indian Railways being governed by kullad and khadi economics seems bizarre to any sensible investor. While pressing issues of passenger safety, punctuality, hygiene, service quality and ticketless travel are ignored, the minister, like an eccentric Maharajah, is sending railway officials scurrying around the country to procure kullads (earthen bowls) for the railway services, even if they will cost four times the price of a thin plastic cup.

But Laloo Yadav is not alone in making gimmicky announcements. Others aim to bring businessmen rushing to meet them on bended knee. Ram Vilas Paswan, for instance, wants an independent regulator for the steel sector, in order to keep prices in check. Surely financial institutions and Indian investors will want to know why the government refused to intervene when low commodity prices were among the important reasons why steel makers were once the biggest defaulters in the financial system. After all, these groups lost huge sums of money when steel shares collapsed and steel company debts were repeatedly restructured.

Then there is Maharashtra Chief Minister Sushil Kumar Shinde, who believes that job reservations are the route to the electorate’s hearts. Shinde dropped the affirmative action proposal after industrialists from the Confederation of Indian Industry (CII) rushed to plead with him; but he now wants to increase backward class reservations in government jobs.

Mumbai businessmen may have bought some respite from mindless populism, but Congress leaders have already dreamt up another mindless populist scheme to take control of 3,000 odd public and charitable trusts in Mumbai. This action too is geared to bring businessmen crawling up to politicians rather than to prevent mismanagement of trusts and misuse of funds. Doesn’t everybody know that misuse of funds is a particular skill acquired by politicians and bureaucrats?

As for the Left, their demands continue to boggle the mind. For instance, leftist trade unions have demanded that the return on employee provident fund (EPF) be hiked to 12 per cent, with a minimum guaranteed return of 9 per cent. The 12 per cent demand happens to be twice the current interest rate, with little leeway for the PF’s to enhance their returns through safe investments. Clearly, what the unions want is another subsidy.

As for the Left view on the capital market, it is fortunate that most investors haven’t even heard about the communist mouthpiece called People’s Democracy. A recent article holds the intra-day squaring up of stock transactions responsible for the price debacle on May 17. Naked trading is what the article calls intra-day trading not leading to delivery; and the writer demands that naked trading be banned. Every single transaction must result in delivery or payments. Similarly, he suggests that a one-year lock in would discourage ‘hot’ foreign institutional money from being invested in India.

It is probably a good thing that the Left parties understand so little about capital markets. They are unaware that delivery volumes are anywhere between 18 to 23 per cent of daily trading and trading turnover would shrink to this level if their demands are taken seriously. And the market will probably shut down.

The article (titled Curbing Speculation Key To Ending Wild Stock Market Swings) suggests that ‘‘operators must be consigned to the derivatives market,’’ innocently believing that derivatives trading is a kind of isolated gambling hell, whose prices and turbulence have no impact on price discovery in the cash market.

Those who have read the piece wonder whether the communists need urgent lessons on the basics of capital markets, or whether investors should exit quickly in anticipation of their rabid opposition to any capital market sops.

When Chidambaram rises to present his budget, he must be conscious that nervous investors have waded through this morass of confusion and are pinning their hopes on the budget to provide a clear policy direction that cuts through most of this rhetorical nonsense and political gamesmanship.

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-- Sucheta Dalal