Sucheta Dalal :Tomorrow's surprise
Sucheta Dalal

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Tomorrow's surprise  

February 21. 2000

In the strange farrago that is Indian coalition politics, the Prime Minister's assertion that there will be some tough decisions to put the economy back on track clearly does not apply to his coalition partners. So when finance minister Yashwant Sinha promises to bite the bullet and announce a tough Budget, what can one really expect?

Mamta Banerjee's first Railway Budget, which ignored the financial position of the Railways to pursue populism, has signaled that the prime minister has little control over his coalition partners. They continue to pursue the narrow compulsions of their respective states and have little interest in the implications these have for the nation.

The proposed petroleum hike and its cancellation is another indicator. After carefully preparing people for a hike by leaking statistics to support the move, the hike was simply dropped because Andhra Pradesh chief minister Chandrababu Naidu reportedly thought that it would affect his party's prospects during the forthcoming panchayat elections. Hopefully, the pragmatic Naidu has only asked for a temporary postponement of the hike.

The two Aruns are facing equal pressure in their respective ministries and their success/failure to manage this pressure will tell on Sinha's Budget. The suave Arun Jaitley staged a coup of sorts with the swift divestment of Modern Foods to Hindustan Lever (HLL).

The sale of just 74 per cent of the equity also allows the government to reassure its employees that the multinational takeover will not immediately endanger their jobs. Moreover, if HLL manages to turn Modern Foods around, the government can make some more money by divesting the remaining 26 per cent through an open offer to the public.

After Modern, however the divestment programme seems to be facing rough weather. It is far more difficult for ministers and bureaucrats to play rough with a strong ministerial colleague than it was for them to muzzle the independent Disinvestment Commission, which was allowed to fade away unsung. Yet, bureaucrats and politicians have already renewed their pressure to prevent divestment.

They are simply unwilling to give up control over public sector undertaking fiefs which pay for luxuries such as computers, fax machines, mobile phones, provide employment to their buddies and relatives and foot the bills for other shenanigans. More importantly, PSU chiefs often act as collection agents for ministers who demand a percentage for all contracts, purchase agreements and jobs.

The divestment target for this year has already been missed and in case Sinha planned to announce radical privatisation moves for the coming year, one will have to see if he can withstand the pressure from his colleagues. He has already rejected a demand from economists that divestment/privatisation should be separated from the Budget effort and funds raised should be ploughed back to restructure the public sector and announce voluntary retirement schemes.

The other negative signal before the Budget is the bailout of Industrial Finance Corporation of India -- the first development financial institution to make losses under the burden of bad loans. The bailout with no compulsion to improve accountability or performance has only paved way for yet another dole to the three sick nationalised banks - Indian Bank, United Commercial Bank and United Bank of India.

Last year, Sinha provided Rs 4800 crore to bail out Unit Trust of India and also announced a huge tax concession for mutual fund investment. This year he will again have to make big provisions for the perpetually looted financial institutions. Then there is the Steel Authority of India - which has recently been aided through a massive waiver of its dues to the Steel Development Fund.

None of these moves indicate any attempt to bite the bullet and push reforms. There are also no indications that the government's reform agenda has the support of the alliance partners.

Sunil Jain of the Indian Express writes that Ram Vilas Paswan (whom he dubs the Sultan of Spend), is already working hard at stymieing planning minister Arun Shourie's attempts to cut the size of government. The biggest supporter of a wage hike for government employees, Paswan had ensured that the wage bill of the government has gone up to 21 per cent of its revenue receipts and has also weakened the finances of all state governments.

Add to this the cost of Kargil, the need to increase defense spending, fixed costs such as interest payment, subsidies and the wage bill and it is clear that Sinha has very little room to manoeuver.

The indicators are that it will need a far more stable government and much stronger political will than this government has, to initiate radical change. The results of the recent assembly elections in Bihar, Orissa and Haryana have only weakened the BJP-led government's ability to dictate to its allies. In Orissa and Haryana, the regional parties have improved their bargaining position vis-a-vis the Centre, while the non-performance of the ruling alliance in Bihar is an embarrassment.

Would the finance minister then still bite the bullet or will he merely force fresh taxes down the throats of those with any ability to pay? Until last week, the stock market expected a miracle from Sinha. In the last few days, the fall in prices indicates a rethink and an unwinding of speculative positions.

Investment experts say that the compulsions of the World Trade Agreement will force government to at least try and push ahead with reform. They also hope that fresh taxes will not reverse the revival in the primary and secondary markets which can provide funds for the much needed restructuring and consolidation of the private corporate sector as well.

Will the Sinha stick be radical or safe? Tuesday will set the course for the economy and the capital market.

Tailpiece: A fund manager tells me that so far his fund has beaten every market index - Sensex, Nifty, Dollex and all the others created by rating agencies and newspapers. The only index that he has failed to beat so far is the K-10. Comprising of the ten odd scrips which have been relentlessly pushed by the big bull operator, the increase in value of these stocks is truly humungous.

The curious aspect is that the operators as well as high-powered politicians who are part of the operator's coterie have continued to back these stocks. The fund manager wonders what this implies -- does it mean that software is unlikely to be taxed in this Budget or have the big operators already dumped stock on institutions and are only holding it afloat until the Budget? We'll know the answer on February 29, 2000.

-- Sucheta Dalal