COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Sinha favours derivatives, open budget, common market; hints at checks on stock swings

Finance Minister Yashwant Sinha said he was hopeful that the amended Securities Contracts (Regulation) Act, 1956 to introduce derivatives will be passed in the coming winter session of Parliament.

Addressing probationers at the National Institute of Financial Management in Faridabad on Thursday night, Sinha said derivatives were well known instruments in the capital markets in several countries. ''It has taken so many years for us to put our act together,'' he said. Derivatives are a hedging device that helps in minimising losses.

The Derivatives Committee, headed by Dr L C Gupta, had recommended introduction of futures. The Securities and Exchange Board of India had approved the report in April 1998. The amendment is basically for considering derivatives for securities under the Act.

Experts say Sections 18 and 19 of the Act prohibit the introduction of derivatives. Earlier there was protective trading in securities, now it is proposed to enlarge the definition and Section 24 will include futures and options trading as part of securities.

Sinha had a dig at former finance minister Manmohan Singh, who had stated that he did not loose sleep every time the stock markets rose and fell. He said what happens in the stock market was serious business for him.

He also said that if stock markets do not behave rationally, then it may be necessary to impose checks and controls on them which may not be desirable

He said capital markets do not behave rationally and added that it was important to gauge the mood of the market.

He recalled that when he was invited to a function at the New York Stock Exchange, its president said that ''you have come to the cathedral of capitalism''. To this, Sinha retorted: ''If this church does not perform, well, what will be its theology?''

This brings into question the role of the state versus the free market. Some argue that market is the final arbiter while others challenge this view.

He said the world is opening up. It is coming together and it will become more difficult to live in ''our shell''. The crucial question is how do we manage change and to prove that in a global environment it is possible not only to survive but also to do well, Sinha added.

Sinha spoke of the need to remove the shroud of secrecy which surrounds budget making. He wanted reconsideration as to whether zero-based budgeting could be reintroduced.

Sinha said the budget is prepared in the basement of the ministry. ''There is no room for that kind of secrecy,'' he said. The expenditure budget should be quite open. This side of the budget for example for the year 1999 to 2000 should be available by September or December and it should be publicly debated. Only when such inputs are received should expenditure estimates be finalised, he suggested.

Sinha said a large fiscal deficit will have repercussions for the current account deficit and therefore on the balance of payments. This leads to a whole set of problems.

Sinha said the finance ministry is discussing the problems with regard to budget making with the government. These problems appear to be surmountable. If, however, they are not tackled in time then it would become impossible to find a solution. ''Challenges will have to be met. If we do not do so then we shall be less than true to our responsibilities,'' he said.

Sinha said an official committee was going into the question as to whether the bifurcation plan and non-plan expenditure was necessary. ''Is there any justification for it when both have a capital and revenue side to it? The ministry is grappling with these ideas,'' he said.

''We tend to live with what we have received and the decision to change and change radically is often completely absent. If we do not summon enough courage to make this radical change, then budgets of the Central and state governments will become meaningless,'' he said.

Sinha said if some projections are made at the beginning of the year the important point is how much ''do we stick to them''. It was necessary to prepare reliable estimates of revenue receipts and if this was not done, the budget will lose its relevance, he said.

Sinha said when the next budget is presented then it will give the actuals of the previous year. Most people, however, will look at the projections.

Sinha said it was important how on the receipts side, estimates are made. The revenue collectors as well as customs and excise collectors are using the concept of ''moving targets''. In some cases ''moving targets'' are less than the actual targets, in which case it fails to serve the purpose.

He said there was tremendous scope for improving non-tax receipts. The fiscal deficit will decide how much should the government borrow. Borrowing is important as on that depends behaviour of interest rates. This in turn decides how much will be available to the private sector. If interest rates go up then investments will dry up.

Sinha said zero-based budgeting which was introduced earlier should be given another try.

Sinha said that in an international context it is becoming increasingly important to insulate the economy. ''We are entering into a phase of more intense globalisation. If east Asian markets come down, then it will have an impact on India. Anything bad has immediate impact, however, anything good does not have positive impact,'' Sinha remarked.

He pointed out that Europe is coming together and the Monetary Union is on the anvil. On January 1, 1999, Euro will come into existence. He in India there is not even a common market. In this context he referred to restrictions imposed by some state governments like Haryana and, therefore, stressed on the difficulties of a common market in the region.

Sinha questioned the relevance of keeping about 836 items reserved for the small-scale sector especially in view of the fact that by the year 2001 free trade area is proposed to be set up among the SAARC countries.

Sinha said, ''We are living with some old concepts. While the government can put restrictions in India how can it do so in other countries?"

Investment from SAARC countries as well as foreign investment from other nations may be deterred by the scale of units. In the year 2001 how can we live with reservation, he asked. The government has already agreed to liberalise 2,000 items which will be permitted free import among the SAARC countries, he recalled.

UNI