If state governments do not take kindly to the new scheme designed to reduce the burden of carrying huge food stocks, the equation in the Budget over this huge drain on the public resources - running to over Rs 12,000 crore in the current year, Rs 4,000 crore more than what was estimated in the current year's Budget-would be upset. Hopefully, the proposed reforms on the labour front will go through because the finance minister, aware of the opposition he may face, has sweetened the bitter pill with several countervailing measures. While he intends to make it easier for corporations to hire and fire, he has increased compensation by three times. While he intends to make outsourcing legal, he has extended the benefits of social security to the affected labour. In addition, he has unfurled a social security umbrella for labour facing the axe. But the moot question is: Will Mr Vajpayee be able to bend critics of globalisation in his own party and outside?

Embarrassing political equations notwithstanding, the economic package should be most welcome for investors. It has a specific programme to tackle infrastructure weaknesses, like the reforms in the power sector, where T&D losses have risen to over 55 per cent and bankrupt SEBs owe Rs 26,000 crore to power utilities.

A few days after the Budget presentation, Mr Vajpayee offered the states a carrot in the form of a one-time write off of dues provided they promised to undertake power reforms. The states now face a political dilemma.The one-time write off of dues is a tempting offer for financially broke states, but will they bite the bait and implement the reforms?

Mr Sinha has taken a number of sensible decisions to reform the financial sector and revive the capital markets. Several steps have been announced to develop and deepen the debt market. Last year's programme to reduce NPAs of public sector banks has had significant success. They have recovered Rs 800 crore. And NPAs as a percentage of net advances has fallen from 14.5 per cent to 7.4 per cent. That Mr Sinha is preparing for the eventual introduction of capital account convertibility reinforces confidence in the system as, among other things, it reflects the government's own sense of confidence in the inherent strength of the financial system. Companies that have issued ADRs/GDRs will be free to utilise the proceeds for foreign investments thereby enabling Indian companies to grow into global corporations. Further, Indian companies after issuing ADRs/GDRs against block shares could list in foreign bourses. Even Indian employees of foreign companies with Esop to their credit can invest abroad up to $20,000annually, thus opening foreign stock markets for Indians with foreign currencies to their credit. No finance minister would have dared to go so far two years ago.

The promise of a stable tax regime is also a welcome step. The Indian tax regime's inequity has often driven domestic savings out of the country. That era will now end. Mr Sinha could have as well abolished dividend tax itself instead of merely reducing it from 20 to 10 per cent. The three-step excise regime of the current year has finally led to a single Cenvat of 16 per cent. Even though this will raise costs of several commodities, on balance, tax stability should be preferred over year-to-year changes. In the context of a stagnant savings of around 23 per cent of GDP, a lowering of corporate tax to near the level of what prevails in South-east Asia will make the Indian market more attractive. The finance minister has adopted the strategy of shifting public savings away from idle bank deposits and low-return securities to high-return corporate stocks. The primary market would do well with a fresh surge of investible funds at a time when many infrastructure projects, including telecom companies, will beapproaching the market for funds.

Seeking to break the barriers that have kept foreign investment in India at a miserable level of around $2 billion annually, Mr Sinha has allowed FIIs to invest up to 49 per cent of the capital of a company in portfolio investments. The provision restricting FDI in non-banking financial companies is being removed for FDI of over $50 million. This should see a surge in investments in mutual funds, investment banks and financial services.

Proposals for dismantling the administered pricing mechanism in fertilisers, petroleum, sugar and drugs is the best news. Lastly, the government intends to keep up pressure to reduce interest rates. In a capital-scarce and low-yield per invested funds economy, policy makers have to follow a middle path that would keep capital costs low but capital profligacy expensive.

That is what Mr Sinha has indicated in administering step-by-step interest rate reduction.

Two statements of intent deserve special mention. For the first time there is a specific programme of downsizing government. Mr Sinha intends to lead by making a beginning with his ministry. The second is disinvestment. In terms of size, the Rs 12,000 crore target may not be worth mentioning. Mr Sinha indicated that in the current year he would have borrowed Rs 111,000 crore to make both ends meet. The disinvestment projected for 2001-02, therefore, is around 10 per cent of the current year's borrowing. But the promise comes in the wake of only Rs 2,500 crore from divestment in the current year against a target of Rs 10,000 crore.

The budget does not allocate the proceeds from divestment to retiring the debt burden. Part of the money will go to restructure assistance for PSUs, for workers' safety net and for budgetary support to the social sector. None of these sectors gaining substantially from the allocation. A bolder proposition would have been to use the proceeds to retire public debt and reduce the huge interest burden of over Rs 120,000 crore. As for the safety net etc., resources could be found from existing revenues through drastic cut in non-plan expenditure.

(The writer is chairman, Ernst & Young, India)