V. Anantha Nageswaran, Chief investment officer for an international wealth manager
There is a document called “Budget Highlights” in the Budget pages of the finance ministry portal. It runs into around 15 pages, with roughly 164 bullet points. Two of the bullet points are devoted to medium-term fiscal sustainability. The temporary deviation from the targets envisaged under the Fiscal Responsibility and Budget Management Act becomes a little more permanent with the fiscal deficit expected to rise to 6.8% of gross domestic product (GDP) from the estimated 6.2% deficit for 2008-09, making it the highest fiscal deficit ratio since 1993-94. The revenue deficit would be just under 5% of GDP in the current fiscal year. The government acknowledges that the fiscal consolidation during 2004-08 was revenue-driven and hence has decided to postpone expenditure reform by another year, for now.
It plans to bring fuel prices in line with international prices, introduce a nutrient-based subsidy for fertilizer use and transfer resources directly to farmers. All these are in the future tense.
By now, any lingering doubt as to how the United Progressive Alliance (UPA) government views the election verdict would have been removed. As some gushed, it was a game-changing verdict; but they completely missed the direction in which the game would change. For the next five years, the game will be played in old arenas under old rules, the key element of which is the inspirational, wise and visionary nationalization of banks carried out on 14 July 1969.
The government views the verdict as a green signal to expand its role in the economy. Put differently, it thinks that the public now expects the government to spend its way back to a high growth rate. That is both an unfortunate and an unsustainable interpretation. Given its development priorities, India would need growth stimulus from the government for quite some time to come. But the challenge for the government is to provide such a stimulus by removing regulatory and bureaucratic bottlenecks and not through higher spending, beset as it is with channel leakages.
Evidently, the government does not think along these lines. The fallacy of the government’s approach will be exposed by the possible reaction of credit rating agencies to this Budget. If they do downgrade India— regardless of whether it is justified in a cross-sectional global comparison—then the cost of borrowing rises; capital exits the country, leaving less available for investment and on costlier terms. All of these subtract from growth.
It is not as though the people in government are stupid. The worry is that they are indifferent to the kind of nation they are leaving behind for the future generation of Indians. Public apathy does not help either.
We thought political parties do not take their election manifestos seriously. Well, we did not, but they did. The Congress party has lived up to its election promises. We chose to delude ourselves that the previous UPA regime’s lack of fiscal responsibility was all the fault of the Communists. Now, we know better. It is another tragedy that the manifesto of the Bharatiya Janata Party was little different from that of the Congress party. People in denial get governments in denial of their obligations to the future.
That is why the one potentially game changing proposal in the Budget is the 100% tax exemption proposed to be given on donations to electoral trusts in the computation of the donors’ income. This should encourage citizens to include donations to political parties in their charitable contributions and to demand accountability in return. It is unclear if Indian businesses and political parties would be comfortable with this approach to political donations. But citizens should seize the opening.
Recently, this newspaper held out the possibility that the Indian economy might grow faster than China’s in the near future—a possibility that Yours Truly viewed as a reasonable prospect. However, a casual attitude to restoring fiscal sanity puts paid to silly such hopes. After this Budget, China should be able to breathe a lot easier about competition from India.
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