The beginning of the millennium presented Mr. Yashwant Sinha with several opportunities to mark a new beginning for India. Mr. Sinha capitalized on this opportunity, and mentioned all the “motherhood is good” mantra in his two hour long speech. There was some practical motherhood as well – about Rs. 5000 crores for the poor sector, and decreased food prices, and increased food availability, for the third of the population that lives below the poverty line. The milk was flowing.

It got better as Mr. Sinha mentioned a single value added tax rate. Other good policies were the decrease in peak duty on customs taxes, the beginning of the rationalization of the same, and the beginning of taxation of the export sector. But before the milk had a chance of reaching overflowing levels, it began to curdle; and curdle it did rapidly.

The curdling began with a big whoosh when the FM mentioned three rates of excise duty in addition to a single rate. This Indian rope trick of getting four duty rates when you announce only one was not exactly welcomed by the stock market when it started to turn tail from a healthy 100 point plus increase. The curdling was in full flow as the market realized that the first millennium budget had completely missed the forest and the trees. What made it particularly tragic was the fact that Mr. Sinha had correctly realized that the core problem facing the Indian economy was the high level of interest rates, the high level of interest payments and the extraordinarily high level of the fiscal deficits.

What did Mr. Sinha propose to cut the fiscal deficit which in this year is likely to be close to 5.6 percent for the centre and perhaps exceeding 11 percent for the entire economy ?. Oh, he proposed a sharp increase in defence expenditures, from about 2.5 percent of GDP to 3 percent in 2000-2001; he proposed an increase in taxes, which was also necessary, and fine. But what did he achieve ? A planned reduction in the fiscal deficit next year from about 5.6 percent to 5.1 percent next year. A big step for the mandarins in the Ministry of Finance, but an insignificant step for the Indian economy, and the Indian industrialists, and the Indian consumer.

While motherhood flowed in terms of cutting expenditures, the reality was the opposite. The largest subsidy, that of interest payments, was left untouched. Interest rates in India are higher by about 4 percent over what they are in most economies of the world; government borrowing (centre plus states) is close to Rs. 200,000 crores; thus, the tax because of misguided interest rate policies is close to Rs. 8000 crores annually on a flow basis; in addition, these high interest rates are constraining India to grow at a growth rate lower by about 2 percent. And yet the Finance Minister announces that growth is necessary to alleviate poverty and make India a super economic power; his Economic Survey echoes these motherhood intentions; and Mr. Sinha goes ahead and does everything to ensure fiscal deficit at a high level, and interest rates even higher.

But this cold reality is apparently lost on those who proclaim motherhood as their major mantra. Let us look at it objectively - Mr. Sinha says interest rates must come down, but proposes text book methods to raise them! What is going on?

Most of the important reforms, in both developed and developing economies, over the last twenty years have occurred in the financial sector. The recent East Asian crisis has only accelerated this trend among the emerging economies. However, and perhaps curiously, most policy makers, trained in the economics of the Keynesian real sector (though Keynes himself was very aware of the importance of the financial sector) missed large elements of developments in the financial sector. It pays to recall Alan Greenspan's warning about the "irrational exuberance" of US stock markets. This warning came in 1996 with the Dow close to 6000. Only three years later, the Dow has doubled, and the new economy NASDAQ almost quadrupled. Future corrections notwithstanding, that call by the leading financial sector policy maker in the world was abundantly and manifestly wrong. Several other leading economists also have apparently got the biggest story of the decade wrong. They have lazily attributed financial market developments (US stock market "bubble" and the East Asian crisis) to the manipulations of twenty-something traders, rather than to the emergence of the new age economy, and its relationship to paperless, borderless and transaction-costless financial markets.

The moral of the story - if US policy makers, and eminent Western economists have not understood the nature of the new economy and its relationship to financial markets, then one should not be surprised with the fact that the (real economy) Indian policy makers have either been disinterested, or clueless, about the importance of, and developments in, in the financial sector worldwide and in India. The fact remains, however, that India has paid a heavy price for this error of commission.

When Mr. Yashwant Sinha, India's Finance Minister, presented the Union Budget for 2000-2001, he was faced with two choices: either be pro-active and achieve greatness, or be reactive, and have greatness thrust upon him. But how will greatness be thrust upon him ? By the financial markets whose workings he so assiduously has ignored. By not pursuing interest rate reforms, the prices of the non-ICE (Information, Communication and Entertainment) stocks will most likely collapse further, and interest rate reforms, and greatness, will be forced upon Mr. Sinha in the future. Such reforms will occur, and the economy, and the non-ICE stocks will boom taking the Sensex to beyond 8000 by March 2001. But nobody should worry about suffering from instant vertigo in the process.