This year the whole pre-budget debate has been against the backdrop of a warning put out by the finance minister a few weeks ago that a hard budget may be on the cards. What is hard nobody knows except that it is literally the opposite of soft. This has been followed by a strong statement from the Prime Minister who used the National Development Council for hitting out against competitive populism. So there will be few raised eyebrows if the finance minister does not make the grand stand announcements that were typical of Chidambaram, even given the fact that a bureaucrat is expected to be as different in manner ofexpression from a lawyer as chalk is from cheese.

It is my considered view that a hard budget is not necessarily bad for the stock market and in fact may fuel the incipient bull market which we have seen since early December. A hard budget would essentially be one which has very tax cuts and so as to keep the fiscal deficit under control. An analysis of the performance of the economy in the last few years shows that the fiscal situation has deteriorated. Government borrowing is at a high level and interest costs are surpassing revenue receipts. Subsidies have been a one way street and have distorted the economy beyond recognition. As a consequence not only is the number of tax payers to the total population very low by any standards, the tax to GDP ratio is one of the lowest in the world.

A large fiscal deficit is never good news for the economy or the stock markets whatever justification of kick starting may be given. When the government spends more than it earns, it ends up printing notes and borrowingmoney from banking system. While the former is straight away inflationary the latter leads higher interest rates. When the interest rates go up in the economy, corporate profits which are already under strain take a further beating. Acquisition of fixed assets are postponed by companies since the rising cost of capital often exceeds return on capital employed (ROCE) projections for projects. This reduces aggregate demand in the market thereby accelerating recession.

Many pressure-groups like FICCI and CII have been crying hoarse asking for relief for beleaguered industries. To some extent these plaintive cries are understandable. Just when Indian industry was trying to cope up with the mayhem created by Singh's massive custom tariff cuts it got hit by global recession of a virulent kind. Steel, cement, chemicals, textiles, paper and many other commodity sectors where domestic industry is strong have literally caved in. Even the domestic demand is being met by low duty imports. In this background industrymaking a beeline to North and South Blocks asking for every type of tax sop is understandable.

However, tax sops for industry is not what a Union budget is all about. Distortions can be corrected through a continuous anti dumping mechanism. It is important that the powers that be do not miss the wood for the trees and start cutting excise duties indiscriminately so as to stimulate demand since such sops would be only temporary. When the patient has a disease, by giving him aspirin you are only bringing the temperature down, not curing the disease.

If there is one area where there is some justification for tax sops it is on dividends declared by mutual funds. For some strange reason even though dividends are exempt from tax, such relief is not available to dividends declared by mutual funds. With the stock market in such bad shape and retail investors practically deserting it, the only way real buying can come into the market is through mutual funds. Here again equity funds are just unable to garnersubscription. It is a very serious macro issue since risk capital formation is key to any industrial recovery. Today more than 90 per cent of the new capital raised in the country is in the form of debt and this is a ridiculous situation. The banks are flush with funds but risk capital is totally absent in the economy. Making mutual fund dividends tax-free may tempt household saving to move into equities and provide a strong foundation for an industrial recovery into the next millennium.

Now is a great time for the finance minister to follow up on some of the bold initiatives of the last few months like the cut in rate of interest on small savings, the cut in subsidies, etc. He should bring out a budget which sends out a clear signal that the fiscal deficit will be reduced by at least one per cent and government borrowings capped. That will mean that the BSE Sensex will probably fall 200 points on Saturday evening but will recover to 4000 by summer. And like Oliver Goldsmith, one would then probably say``And those who came to scoff remained to pray''.