From Business World of 29 December 2004.
The question
marks
Rohini Malkani of Citigroup has done a
post mortem of her team’s forecasts in 2004. The results are sobering. Their
biggest mistake was the big bet they placed on the return of the NDA; but then,
who did not? And having missed the upset, they also missed the stock market
meltdown and the reversal of capital flows that followed. But in the end, it
does not matter; looking forward, 2005 looks the same as 2004 – a great year to
come for the Indian economy.
Actually, there
is no great merit in predicting the expected; and no one can predict
unexpected. Well, astrologers can. They will be wrong half the time, but as
long as they do not charge too much, their mistakes will be forgotten. And as
long as they attract a few high-profile clients, some of their forecasts that
turn out right will make their reputation.
In the end the
laws of averages must catch up with all of us, if death does not do so earlier.
Still, what is a new year for if not for indulging in some folly? So let me try
my hand. But not with trivialities like whether Uma Bharti and Govindacharya
will get together, or whether Govinda and Govitrikar will open the same mall.
Let me take those few momentous matters which hang in balance.
The first is the
fate of the dollar. The US is running a huge payments deficit. It is being
financed by central banks which have been buying US government securities. By
doing so, they have kept down the value of their currencies in terms of the
dollar; they have thereby helped exports and hindered imports and thus improved
the current accounts of their countries. India is one of them, but the
heavyweights are Japan and China. The European Union has refused to buy
dollars, so the Euro has soared in terms of the dollar. The question is, will
all the central banks’ purchases of the dollar prove insufficient at some
point? What will happen then? My answer is, nothing. The governors of central
banks will go into a huddle; so will the leaders of G-7. Behind closed doors,
they will harangue President Bush and Alan Greenspan. In the end they will work
out a dirty compromise – the US will raise interest rates, the Eurozone will
reduce them, China and Japan will buy more dollars, and so on until the next
meeting.
The next
question arises out of the first: what will happen to the Rupee-dollar exchange
rate? Will Reserve Bank continue to buy dollars? Or will it let the Rupee rise?
On this there are sharp differences within the government. A fraction within
the finance ministry favours appreciation. Reserve Bank let the Rupee rise in
2002 and 2003. But it could not bring down domestic interest rates enough
because government banks cannot survive without fat margins; and if you keep
interest rates high while appreciating, you attract an uncontrollable flood of
hot money. The one thing that is absolutely worth doing – removing or
abolishing import duties – the finance minister cannot do, for reasons I will
come to. Reserve Bank cannot afford appreciation. And the government will have
to live with it. Reserve Bank will continue to accumulate reserves, and to
issue Market Stabilization Bonds.
The third
question is a more immediate one: what will P Chidambaram do in the budget?
There is no way he can square the circle. Revenue growth this financial year
has been disappointingly. The ministry is off target on fiscal correction. In
the coming year, he will have to find money for the employment guarantee; he
cannot do that and meet his fiscal targets. If he were to reduce customs
duties, he would be off target even more – which is why duty reductions, if
any, will not be significant. So what will he do? He will provide for the
employment guarantee, but will hope it will be slow to take off and will absorb
little money. But – this is the important point – he is very likely to raise
taxes. The VAT regime will freeze indirect taxes, so the increase can only be
in income tax.
And finally –
will universal VAT come on 1 April? Yes – but it will look little different
from the old mess of excise duties and sales taxes. CBEC and state sales tax
departments have been busy copying their old rules into new VAT manuals; so
taxpayers will find it impossible to get VAT credit. We will introduce VAT, but
it will be a many-handed, many-faced Indian VAT.
