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Tough revenue-raising steps seen in Indian budget

NEW DELHI: Indian Finance Minister Yashwant Sinha has to walk a tightrope between political expediency and economic reality as prepares the next budget.

His task is to raise revenue and rein in government spending in a bid to cure the country of its crippling fiscal deficit.

He could be forced to take steps that finance ministers before him have baulked at for fear of upsetting voters -- removing subsidies on public utilities like power, transport and education and hiking some taxes.

Sinha has already prepared financial markets for some harsh measures in his budget for 2000/01 (April-March), which will be unveiled in parliament on February 29.

He has says the government has run out of soft options and will not hesitate to "bite the bullet".

India has targeted a fiscal deficit of four percent of gross domestic product for 1999/2000, down from 4.5 percent the previous year.

Analysts say this target will not be met, partly because of unexpected expenditure on a 10-week clash on the Kashmir border with Pakistan, snap general elections and a cyclone disaster in the eastern state of Orissa.

"I expect the fiscal deficit to be at least six percent of GDP in 1999/2000," said B.B. Bhattacharya, director at the Institute of Economic Growth.

He said the fiscal gap would widen to double figures if the deficits of state governments and the losses of public sector firms were added to the federal government's deficit.

SPENDING RIGIDITES LIMIT OPTIONS

Analysts say structural rigidities limit the options available to the government to check spending.

Around 80 percent of the 1999/2000 budget's non-plan expenditure -- which is on revenue items that do not create productive assets -- is earmarked for interest payments, defence, subsidies and wages.

Although interest rates have come down over the past year and the outlook remains soft, the impact on the government's payments will be limited as the lower rates apply only to fresh debt.

At 880 billion rupees ($20.18 billion), interest payments account for the largest chunk of revenue expenditure of 1,903.31 billion in the 1999/2000 budget.

Defence analysts expect spending on the country's armed forces to go up by 15-20 percent to around 540 billion rupees in 2000/01 from the current financial year's 460 billion.

"There is no option but to boost revenue as there is little leeway to check expenditure," Bhattacharya said.

One source which could help bridge the government's revenue shortfall is its ambitious programme to sell off stakes in state-run firms.

India's record on partial privatisation has been, at best, patchy. Successive governments have missed their "disinvestment" targets due to a combination of poor market conditions and an unwillingess to relinquish control by selling majority stakes.

Since 1991/92, when the programme began, the state has raised only 182.88 billion rupees from a cumulative target of 440 billion.

"What signal the markets are looking for in the budget is the pace of privatisation," said Sree Sankar, chief investment officer at DSP Merrill Lynch Asset Management Company in Bombay. "The market's budget expectations are very much spelt out in the share prices of almost all public sector undertakings."

Sankar said shares of almost all listed public sector firms were trading at historic lows, except for two telecom firms, Mahanagar Telecom Nigam Ltd and Videsh Sanchar Nigam Ltd.

Analysts expect the government to introduce legislation to set a ceiling on government debt and discipline future expenditure. Once this law is in place, any overshoot in the government's borrowings would need parliamentary approval.

It is also expected to simplify the taxation structure to help ensure better tax compliance. -Reuters