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Indian critics give thumbs-down to budget

NEW DELHI: India's industry leaders and commentators gave a thumbs-down on Wednesday to the budget for the coming fiscal year, but Finance Minister Yashwant Sinha took the flak in stride.

Critics said that -- far from "biting the bullet" as promised -- Sinha had failed to arrest the fiscal deficit's towering climb and had soft-pedalled on much-needed reforms.

They said his budget for 2000/2001 (April-March) had taken steps in the right direction, with increases in rural expenditure and social spending for the poor.

But, perhaps constrained by the demands of coalition partners, the debt-burdened five-month-old government had not gone far enough in cutting subsidies, downsizing the administration and privatising the lumbering state sector.

"No Big Bang, Jumbo Fiscal Mess," declared the banner headline of one newspaper, summing up the mood of disappointment in a finance minister who only weeks before had declared that there were "no soft options" left.

Although the budget allows foreign funds to invest more heavily in Indian shares, market players were unnerved by moves to double the tax rate on dividends paid by companies to 20 percent and phase out tax concessions on export earnings.

Sinha conceded at a downbeat post-budget meeting with business leaders that the dividend tax hike might have unnerved the market, but said he was not troubled by the decline.

"I am not at all worried by the fall in market cap," he said. "The market will bounce back in the next few weeks, few months after the measures we have taken fully sink in."

The minister said his budget had introduced measures to bring the fiscal deficit down. He added that had his hands not been tied by the need for a quantum leap in defence spending he could have gone even further.

Sinha targeted a fiscal deficit of 5.1 percent of gross domestic product for 2000/2001, down from 5.6 percent in the year now ending on March 31.

The budget raised defence spending by a whopping 28.2 percent, with an allocation of 585.87 billion rupees ($13.62 billion) compared with 456.94 billion rupees the previous year.

"The amount of additional money that I had to make available for defence was completely unavoidable," he told the Federation of Indian Chambers of Commerce and Industry (FICCI) meeting.

"If I had not made this additional allocation I could have brought the fiscal deficit down by 0.6 percentage point."

Investment bank Lazard India Ltd said in a report, "Union budget - 2000/01: A Victim of Coalition Politics", that Sinha had failed to address several issues.

"Strictly speaking, major fundamental issues such as reduction of government debt, controlling government expenditure, fiscal discipline and divestment have been largely unaddressed or at best just touched upon in the budget speech," it said.

"The government debt as it stands today is an appalling 10,000 billion rupees ($229.36 billion)," it said. "There is no clear direction as to how this will be tackled."

Sinha said the budget had "created the necessary conditions" for a reduction in interest rates, but a move in this direction was up to the central Reserve Bank of India (RBI).

But the central bank's deputy governor, Y.V. Reddy, told Reuters Television that monetary policy would be eased when necessary, and steps in this direction are not necessarily linked to the budget.

The market had been expecting the RBI to lower the bank rate of the cash reserve ratio after the government cut rates on some public savings schemes in January.-Reuters