"I must confess to you that at times the BJP [Bharatiya Janata Party] is misunderstood, misreported and statements are quoted out of context," says India's new finance minister Yashwant Sinha.
This is Sinha's comment on BJP president Kushabhau Thakre's observation that India should leave the World Trade Organization. Sinha says it was a misquote on the part of the Indian press. "He contradicted that statement the next day."
Sinha talked to Euromoney on his and his party's 100th day of government. That's considerably longer than the BJP's last and only other period of office in 1996. That attempt by India's Hindu nationalist party to govern lasted only 16 days.
For investment bankers it may seem like a 100 days too many. During this short time, the BJP has tested nuclear devices, received US sanctions and been downgraded from investment grade to junk. "India was supposed to be a safe haven in a troubled Asia," commented one banker. "But it's blown it." Another Indian-born banker was even more pessimistic: "I worry the sanctions will set us back 10 years."
If Sinha is worried, he doesn't readily show it. He says the world will have to get used to a more assertive India, and he dismisses fears that sanctions will drag India into recession. "The US's own estimation is that sanctions might end up doing about $2 billion of damage. One doesn't know," he says. "Their own statements show that they're aware of the fact that sanctions don't work. So hopefully sanctions will not hurt India in the long run."
Investors are not so sure. Foreign investors dumped $370 million of Bombay shares within six weeks of the nuclear blasts. helping pull down the Bombay stock exchange 22%. A ban on short-selling made matters worse - just as it did in Malaysia, where prime minister Mahathir pioneered this disastrous policy last September.
The rupee has been hit too - a fact that has not helped Indian corporates which borrowed $4.5 billion of dollar-denominated bonds last year. Meanwhile opponents have been quick to exploit the BJP's apparent confusion on economic policy. Former finance minister Manmohan Singh told the Times of India : "Even now, one day the finance minister says the Reserve Bank of India will not intervene to prop up the rupee, the next day he says it will."
Sinha does not react well to the charge that he has mishandled statements about the currency. He is especially sensitive about a comment attributed to him on market forces determining the rupee's value - a statement which led to the currency getting hammered. "I did not make that statement. I was misquoted," he says. "All that I have been saying in parliament and outside is that we are interested in orderly conditions in the market."
His first budget - delivered at the beginning of June - was almost as explosive as India's activities in the Pokhran desert. US rating agency Moody's reacted shortly after by downgrading India to one notch above Indonesia.
Suitably enough, Sinha began his budget speech by describing it as "a defining moment in history" and couched his delivery in nationalistic invective. But strong talk quickly turned to embarassment, as four taxes and subsidies were repealed or altered within days. The first to go was a rise in petrol excise tax. This led one member of the opposition to observe that never in post-independence India had a tax been presented to parliament and reversed within 24 hours. The Economic Times of India characterized the budget as marred by "avoidable goofups".
The second measure to be repealed was even more politically sensitive. Withholding tax, aimed at those with foreign borrowings, was similarly axed when it was calculated that it could add up to 35% to corporate borrowing costs at a time when sanctions are already hitting big Indian companies hard.
However, the most serious backdown was over the so called swadeshi tax. This tax was initially announced to resounding acclaim from Indian industrialists.The BJP has never made a secret of its nationalistic approach to economics, but even still this took many moderates by surprise. The swadeshi tax was an 8% import duty, and was immediately characterized as protectionist.
But ideological budgets don't fit well with global markets, as Sinha was quickly to discover. Within days of the budget it became clear that even India's industrialists found the new levy irksome. With such a large component of their raw materials imported, local corporates protested that the tax rise would have the opposite effect to that desired - it would make them less competitive. Some economists argued that it would add 2.5% to inflation. The finance minister rolled back the swadeshi tax to 4%.
Sinha explains: "What I did was impose 8% and then rolled it back to 4% for the simple reason that there was a considerable depreciation of the rupee after the presentation of the budget. To our way of thinking an import duty is needed to create a level playing field since local industry bears the burden of local taxes. Imports don't. This is a countervailing duty to eliminate a disadvantage from which Indian industry suffers."
Sinha declares that his changes represents "the spirit of accommodation" that runs through the new administration. The opposition, on the other hand, pointed out in parliament that the budget had been virtually re-written.
The overall impact of these budget about-turns was that the fiscal deficit rose from 5.6% of GDP to 5.8%. However, former finance minister Singh does not discount the possibility that a supplementary budget might be necessary later this year.
The budget assumes corporate tax collections will go up by 24%, industrial growth by 10% and a 7% growth in GDP - against 5% last year. Net foreign aid, ignoring the impact of sanctions on finance from the World Bank and the Asian Development Bank, is slated to double from R1,201 crore to R2,337 crore ($282 million to $550 million).
Asked about the above, Sinha replies: "I have worked out the figures on the basis of averages over the past five years, and the average of last year and this year. So I don't think my budget estimates are unrealistic unless something very unusual happens over which nobody has any control."
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