India's Finance Minister: From Mild Mannered To Man Of Action

Hired not to rock the boat, he's doing just that

Indian Finance Minister Yashwant Sinha is a worried man. In January, Sinha warned that India was facing an "intractable" budget deficit. He called for drastic cuts in subsidies and other government expenditures to prevent a crisis. In a bold admission, Sinha blamed India's populist policies and the inability of even his own party--the ruling Bharatiya Janata Party--to make tough decisions to reduce spending. Recently, the former socialist expressed extreme unhappiness with the economy's 5.5% growth rate, saying India needs 7% or 8% to reduce its high level of poverty.

These pronouncements mark a surprising transformation in Sinha from loyal party man to would-be reformer. When Prime Minister A.B. Vajpayee appointed Sinha last March, any hopes that the BJP would get serious about India's economic problems quickly faded. Sinha, a career bureaucrat and former Finance Minister with few achievements to boast of, looked like a weak player chosen as a compromise between the BJP's moderates and hard-liners. But now, he may finally take action before India's economic health turns critical.

That Sinha, 62, should be talking tough on reform comes as a complete surprise to many. His public debut as the BJP's Finance Minister was inauspicious. Instead of pushing for belt-tightening measures and further reform in the annual budget last June, Sinha presented a tepid paper. Later, his prediction of an economic recovery by September proved embarrassingly off-base.

BALLOONING DEBT. But after watching the economy deteriorate for nine months, Sinha has concluded that tough measures are needed fast. He is talking openly about the government's inability to control spending at either the national or state level. India's total budget deficit is more than 10% of gross domestic product, according to Sinha. Tax revenue is dropping, too, and more than half of it goes to servicing India's ballooning debt. "No nation can live on borrowed funds for long," says Sinha. With inflation in the double digits, jittery Indians are buying record amounts of gold.

Sinha has only one chance to stop the slide: by presenting a second, much tougher budget this Feb. 27. He plans to raise $1.2 billion by privatizing state-owned companies like Gas Authority of India and long-distance carrier VSNL. He also wants to reduce the size of government, simplify tariffs, cut unnecessary subsidies, and eliminate the enormous waste in the welfare system. To raise more money, Sinha proposes ending the tax exemption on agricultural income that many rich farmers enjoy. That move could generate $2 billion in new revenue.

The Prime Minister is backing Sinha, but that may not be enough in the fractious BJP. Says Omkar Goswamy, an economist for the Confederation of Indian Industry, "Sinha has understood the need for hard reforms, but he doesn't have many supporters either in his party or the coalition." Others fear Sinha will have to make too many compromises. Bibek Debroy, director of the Rajiv Gandhi Institute of Contemporary Studies in New Delhi, says Sinha's budget will end up "a damp squib--or worse." The BJP's radical wing still wants to promote Indian self-sufficiency with sky-high duties on imports and more subsidies to local industries, and they are not interested in Sinha's budget. "There has been some resistance within the party," admits Sinha. But with a crisis just around the corner, he says, he thinks he has a better chance of building support.

A lot is riding on Sinha's efforts. Some of his opponents say Sinha is exaggerating the perils India faces. The country, after all, has healthy foreign exchange reserves of $30 billion. But these reserves could vanish fast if oil prices, currently at a historic low, start to rise, deepening the economic crisis, warns Vikrant Raina, who follows India for Goldman, Sachs & Co. in Hong Kong. Foreign investors, whose capital is vital to India's expansion, are also getting nervous about the economy. And they see political stability vanishing if Hindu fundamentalists continue their persecution of religious minorities. A smart budget could boost confidence in the BJP. It's up to one man to pull it off.

Before it's here, it's on the Bloomberg Terminal.