3Rs and the Arithmetic

Budget Comments for Indian Express, 6/7/2009

In assessing the Union Budget, the economic and the political contexts are pertinent. The economic context, well captured in the economic survey, is challenging though India came through the meltdown better than any economy and can reasonably expect a faster return to high economic growth, unlike any country, with the exception possibly of China. In the political context, the Government, with its five year life span well insured, has more elbow room than in the previous five years for some dramatic action, raising high expectations. The economic survey was a breath of fresh air and a visionary economic document. Reading in it the direction board for this Government, expectations from the budget rose. Ministerial declarations of intended reforms also gave rise to the anticipation of the budget aggregating them into action plans.

The economic survey unwittingly became a hard sell flyer for the budget and the market repeated history to move into negative zone. Such a reaction is to miss the essence of the budget. The budget is essentially a preface to the next five years of action, and not an executive summary. There is enough hint that the Finance Minister has a five year time horizon for all things crucial. The contours of the task have been well articulated : an early return to 9% GDP growth, facilitate inclusive growth through creation of 12 million jobs, maintain 4% agriculture growth, reduce BPL Indian population by half by 2014, raise infrastructure spending to 9% of GDP by 2014 and recommit to fiscal discipline targets at the earliest. These are beyond dispute and not out of reach, with some caveats.

An appreciation of this background facilitates a more objective assessment of the budget on three key parameters.

Rural economy

The largest recipient of the incremental budget funding is undoubtedly the rural economy. Bold hikes have been made in the outlays for the Government’s banner schemes that treat jobs and food security as the rights of the Indians – both bold and enlightened. The last one year has amply proved the political and economic dividend from this commitment which also proves that good economics and politics can co-exist. The multi-pronged boost to the rural economy created the bulwark of consumer demand against the economic meltdown, proving its efficacy and emboldening the Finance Minister to scale up.

Revival

There can be different views about the effectiveness of the Rs 200 billion pumped into the economy in three revival packages, but frankly there is no sagely incremental step to recommend. Therefore, the Finance Minister has chosen to continue what has worked. Despite fiscal pressures, he has shown the conviction not to withdraw any of the concessions.

In essence, by holding course on the revival programmes and stepping up boost to the rural economy, the budget underlines the recognition of the Government’s interventionist role. At times like these, the Government has to continue leading with public investment which leads to demand stimulation, paving the way for private investment to fulfill its role, which again the Finance Minister has acknowledged. But that is some distance away and we can give the benefit of the doubt to the Finance Minister that his silence on the subject of policy reforms does not necessarily mean he is not ready for it when private investments find its way to the economy.

Reforms

While the budget is devoid of big headlines, the Finance Minister leaves us in no doubt about this Government’s commitment to tax reforms and hopefully the breakthrough of GST before the next budget is presented. There is enough to promise forward movement in the disinvestment agenda. One hopes, the specifics follow soon.

Where the budget disappoints is the absence of administrative reforms for effective implementation. The country’s balance sheet has now grown to well over Rs ten lakh crores. We are becoming a huge welfare state with public funding of unprecedented levels that demand assured efficiency and clear accountability. Yet, one does not see any attempts to reform the administrative mechanism. Such a move has no political opposition.

The former Finance Minister Mr P Chidambaram mooted a good thing when he suggested outcome budgeting. The levels of expenditure mandate modernization of our financial management.

Arithmetic

The fine print yet unknown, the arithmetic of the budget holds some worries – and some skepticism. 2009-10 is the kind of year when expenditure cannot be easily reined in, but the revenue is suspect. With a fiscal deficit of 6.8% of GDP – and lot more in actual terms – the Indian economy is playing on a thin edge. There is the threatening chasm of Government borrowing causing interest rates to flare up and crowding out private investment. Bond yields of 7% send out the warning signals.

What can see us through is dogged perseverance on the part of all administrative ministries to translate the intent of the economic survey into reality. There is no better opportunity to utilize a five year mandate to make India the fastest growing economy and a member of the developed world. Make no mistake about it. These are the formative years of an economic super power.