Budget to counter impact of
economic sanctions
The dramatic change in India's political scenario, resulting from the successful
nuclear tests, presents Finance Minister Yashwant Sinha a rare opportunity to come up with
a bold economic strategy when he unfolds the Union Budget for 1998-99, on June 1. His
first major concern would be to find ways of safeguarding the country's economic
interests, in the face of an unexpectedly strong international outcry against the Pokhran
tests, and the tough sanctions being enforced by the US, joined in varying degrees by
Japan and Germany, say economic experts. The
sanctions, though not of a destabilising character, would certainly affect several ongoing
infrastructural and other projects, as official loans and government backed credits from
these countries freeze for an uncertain duration. Encouragingly for India, other major
powers like France, Britain and Russia have ruled out similar sanctions, blocking any
concerted move against New Delhi. Meanwhile, with only 10 days left before Parliament
reassembles (on May 27, the Vajpayee government has to shape a credible response to the
political and economic challenges thrown up in the wake of the nuclear tests that would:
* reassure world of its commitment to peace
* stabilise the economy and accelerate its growth process
However, India has to put together a contingency plan for the
short-term to keep critical projects funded while the coming budget would need to spell
out in clear terms the economic vision of the Vajpayee government, so that international
investors feel reassured that policy uncertainties are removed.
Although the US sanctions provide for its vote against new
World Bank loans to India, it will not affect disbursements of committed aid in pipeline
of some $ 8 billion. But in the fiscal year ending June 1998, the bank will not be able to
meet its lending target of $ 3 billion as only $ 684 million had been approved till April,
the fate of the propssals for another $ 980 million for appraised projects in the power,
highways and other sectors before the bank's board for approval remains uncertain as at
present.
External assistance, bilateral and multilateral, continues to be of importance
to India's development though the net debt flows have become negative in recent years, in
view of the larger outgo by way of debt servicing. Yet gross aid disbursements remain
crucial in mitigating the rigours of debt servicing which will continue to be of the order
of about $ 9 billion over the next four to five years.
In the 1990s, private flows have overtaken the official assistance, and India
could mobilise $ 10 billion dollars in 1997 by way of foreign direct investment (3
billion), portfolio investments, bonds and external bank loans. It is these sources that
India has to nurture if it has to secure a sustainable balance of payments position,
keeping current account deficit within 1.5 to 2 per cent of GDP.
Sinha, in his recent visits abroad, had assured that India would broaden, deepen
and accelerate the reform process, and invited substantial FDI in infrastructure and other
priority areas. The government's need for a larger flow of investible resources in 1998-99
has become all the more with the uncertainty that has now crept in regard to official
flows.
The existing and potential US and other foreign investors, shaken by the turn of
events of the past week, are looking for what the government will offer in the forthcoming
budget. In order to overcome the negative factors like the sanctions, government is
already gearing itself upto speeding up clearance of projects in the power, oil and other
sectors. And toning up procedures so that there is no disruption in inflows of FDI.
An expansionary budget, with more public investments to help kick-start the
economy, would have to rely on additional resource mobilisation of a large order. The
Prime Minister as well as Sinha have been hinting at hard options, and the national mood,
buoyed by India's graduation into a nuclear power, may well be taken advantage of by the
Vajpayee government to devise fiscal measures to keep down the revenue and fiscal deficits
to more sustainable levels.
Demands on the budget have grown, and the finance minister will have a hard task
in balancing the needs of development, infrastructural and social, with those of national
security, a hightend awareness of which has been created by BJP-led coalition. The
external dimensions of the budget would most likely be centred on attracting as high an
order of direct investment flows as possible. Apart from a clearcut FDI regime, the
investors would look at the total picture, particularly indications for sound
macro-economic management, continuation of reforms especially in the financial sector and
public undertakings, and the overall balance that the government, committed to a strong
swadeshi thrust, brings to bear in re-shaping an outward-oriented economic policy.
Broadly, trade flows will remain unaffected though
part of US sanctions target certain exports to India. Here again, it is US business which
would suffer while India is sought to be punished. US firms with financing facility from
the exim bank or the Overseas Private Investment Corporation (OPIC) will stand to lose,
like Boeing which has a multi-billion dollar order from Air India, or even Enron which is
building a major power plant South of Mumbai. |
