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February 28, 2001                                       Feedback  

    - EXIM POLICY '00



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'Interest rates will fall'

Mahesh Vyas

The finance minister has rightly not considered the Rs 300,000 limit for salaried persons. We must appreciate the need to increase the tax base. It would not be appropriate to provide salaried people exemptions and reduce the tax base.

The Budget prepares the economy as a whole for the World Trade Organisation by reducing the cost of capital, through reduction in interest rates on small savings. It also reduces the rigidities in labour laws.

These two measures will go a long way in preparing the economy and the textile sector in particular, in meeting the WTO challenges.

The Budget is well balanced for the long-run growth of the economy. But there is nothing in it to kick-start the economy from its slowdown.

The administrative price mechanism is being phased out. So, the prices of diesel and petrol will reflect international prices of petroleum products. The Budget plays a small role now.

Do not expect any magic on the capital markets. Only expect short-term volatility for now.

The Budget plays a very small role in next year's growth. We want less of the government. Next year's growth depends on the next monsoon and is constrained by the lack of investments. So some placid growth rates can be expected next year too.

I will rate the Budget seven out of 10.

The fiscal deficit is well in control. It is 5.1 per cent this year and will be less than five next year, which is pretty good. However, we can let go of our fetish on the gross fiscal deficit and look for more growth.

The private sector is involved in higher education, but the minister has announced further government participation. The government should stick to primary education.

Customs duty on information technology hardware is down, which is good. Now, one can buy more hardware and chat more on the Internet, besides doing other useful work.

The Budget's impact on productivity will be very positive. Interest rates will fall and labour costs will rationalise. Further, the Budget gives a clear message that reforms will continue. Thus, private enterprise can invest with the confidence of a sustained consistent policy regime.

We all have to realign ourselves in an environment where interest rates come down. This is for our overall benefit, as it will lead to the economy improving competitiveness.

Interest rates have to decline and the constraint to their decline is the stickiness at the lower end, as they are government mandated. All interest rates (including those of borrowing) will decline. And this will lead to a decline in prices.

On whether reduction in customs duty will lead to booming equity valuations, if stocks are priced high because of effective protection from high tariffs, then we are living in a fools paradise of having high valued assets and high priced products.

Do you want to buy the costliest shoes so that the company that manufactures them remains rich? Let prices of shoes and everything come down and companies be forced to make profits from efficiency gains and not artificial props like custom duties.

Mahesh Vyas is director, Centre for Monitoring the Indian Economy

Budget 2001

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