It's An Issue Of Good Governance, Mr Sinha (4 March 2002)
After all the news and the fine print has been analysed, the one group of people who emerge as the hardest hit by finance minister Yashwant Sinha’s budget is the tax paying, law abiding, middle class. These are the milch cows of the finance minister, or as Rahul Bajaj said, the ‘golden goose’— they can be punished effortlessly and have little power to protest.
So, the finance minister has them paying higher taxes, has socked them with tax on dividend income and discouraged their savings by scrapping the tax shield. We need the money for ‘national security requirements’ he says, and thinks that people ‘will not mind this’. He is wrong. The middle class is seriously angry. Also, some simple arithmetic gives you a different perspective on his defence surcharge. How much has bad governance and corruption in the financial sector cost us? Or, what is cost of different bailouts that let off the guilty vis-a-vis the amount that the FM collects by hitting this group?
The middle class has been reeling from the effects of multiple financial scams that have wiped out large chunks of their savings. They lost heavily because of their misplaced trust in government owned Unit Trust of India; their high risk investments went bust along with the Ketan Parekh led bull run; and the return on their low risk savings had dwindled steadily over the years.
In most cases, they are the victims of poor supervision and accountability on the part of government agencies and regulators. Yet, Mr Sinha’s speech barely touched on these issues. Apart from a cursory mention about boosting ‘investor confidence’, he ignored supervisory failure and offered the long overdue changes in the Securities and Exchange Board of India Act as the only palliative.
Let us start with the very hypocrisy of playing on patriotic sentiment by calling the increase in income tax a ‘defence surcharge’. This is complete nonsense. Although the government may have to spend more on the country’s defence, the fact is that Rs 5,000 crore of last years’ defence budget will be surrendered unspent because of mindless red tape.
A ‘Gujarat surcharge’ or a ‘defence surcharge’ goes down much better than a ‘scam surcharge’ or a ‘failed supervision’ surcharge, doesn’t it? But the latter is what the people are really paying. The FM does not even mention financial scams. The Reserve Bank and the Securities Exchange Board of India portrayed Scam 2000 as a mere “irregularity”. Mr Sinha did even better. He delicately referred to it as “various disturbances that have occurred in the capital market”.
But we are paying through our nose for these ‘disturbances’ and the finance minister’s budget does not even bother to tot up the cost of poor supervision to the exchequer.
A day after the budget, revenue secretary S Narayan, told a leading paper that government expects to mop up Rs 1,500 crore each from the cut in tax rebate under section 88 and the dividend tax. As against this, the one bailout and re-capitalisation (Indian Bank) that Sinha’s speech mentions alone is Rs 1,300 crore. Don’t forget that this is Indian Bank’s third bailout (it received Rs 1,750 crore in 1997-98 and another Rs 100 crore in 1998-99) in five years.
Let us look at Unit Trust of India. It has been widely reported that the second US-64 bailout in three years will cost around Rs 5,000 crore. But the finance minister’s babus have skillfully postponed this payout to May 2003 and it stays out of this year’s budget. The cost will eventually be recovered from the taxpayer.
Similarly, the budget makes no mention of how the gap between actual returns and promised returns under UTI’s 16 odd assured return schemes will be bridged — this is estimated at over Rs 10,000 crore. Of this, Rs 2,000 crore plus is due to be paid in the next few months. The FM hopes to extract this money from financial institutions by calling them UTI’s sponsor institutions.
Mr Sinha does not intend to scrap the UTI Act either. That would mean losing control over an organisation that has been a convenient handmaiden to various governments for decades. He merely promises “legislative changes” in the UTI Act. This will allow government to appoint its chairman and influence its decisions while the so called FI sponsors will be asked to bailout the assured return schemes.
Furthermore, the FIs themselves are looking for a dole. They are stuck with a whopping liability of Rs 6,200 crore on the ill considered Enron deal on top of their monumental bad loans (nearly Rs 20,000 crore). The Industrial Finance Corporation of India has already received Rs 400 crore out of a Rs 1,000 crore dole that was cleared in 2001. It will be back for the rest.
The soon-to-be-corporatised, Industrial Development Bank of India strongly denies seeking a Rs 3,000 crore bailout, but the FM has quietly granted it un quantified relief by converting its World Bank and NIC loans into “appropriate long term instruments”.
The minister probably hopes that the setting up of Asset Reconstruction Companies will make the bad loans of banks and institutions magically disappear. Banks have been asked to cough up the money for a pilot ARC, but the budget makes no mention of repealing the Board for Industrial and Financial Reconstruction and Sick Industries Companies Acts. Will the strengthening of creditors rights through the Banking Sector Reform Bill be enough? Bankers doubt that the bill will give them enough teeth to force recoveries and fear that the ARC may only shift bad loans from one basket to another.
But let’s go back to the bailout numbers that even the experts refused to discuss. Just a partial narration of bailout liabilities adds up to approximately Rs 7,500 crore for US-65, IFCI and Indian Bank alone. This does not include the potential Rs 10,000 crore problem with US-64’s assured return schemes, or the Rs 6,000 crore loans to Enron’s Dabhol project or the one time settlement that will be made to state electricity boards to pay for power theft, arrears and subsidies.
All these need a ‘scam surcharge’, Mr Sinha not a ‘defence surcharge’. What is more, in hitting the middle class so hard, the finance minister seems to have forgotten that they are also his biggest consumers as well as his most diligent savers. Industry needs them to buy their products and drive demand while the government needs their savings to fund long gestation infrastructure projects—-a point that Sunil Alagh of Britannia Industries was probably trying to make to the finance minister on Friday. But is anybody listening? -- Sucheta Dalal