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UPA’s last chance for redemption

UPA’s last chance for redemption
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First Published: Mon, Feb 28 2011. 01 15 AM IST

Updated: Mon, Feb 28 2011. 09 44 AM IST
Every which way you look at it, this year’s Union budget is very important.
Consumers, who rarely count midway through a government’s term, are looking for relief from inflation and governance failures; similarly, the growing legion of impatient youth (50% of India is less than 35 years of age) needs jobs. Indian industry, despite its newly acquired chutzpah, will not say no to sops, but would rather that the government provided clarity on crucial tax reform that’s pending. Foreign institutional investors, who drive the country’s stock markets, want to see the government commit to fresh reforms. And finally, the cadres of the Congress party, which leads the United Progressive Alliance (UPA) coalition, are hoping that the budget will give them that desperate break that would help them reverse their political fortunes.
All interest groups, therefore, have expectations—however minimalist they may be, as the Mint-Synovate study of focus groups showed—riding on the budget. On the other hand, the UPA’s back is to the wall and it only has itself to blame for this.
A series of missteps (some of which, like the Commonwealth Games disaster, could easily have been avoided by a government less prone to hubris) beginning somewhere just after the presentation of the Union budget last year has left it vulnerable and distracted. The developments over the last one month, especially after the Supreme Court took charge of the oversight of investigations into various alleged scams (what is otherwise a function of the executive), have only worsened the situation.
Now, this can be a good thing or a bad thing. When things are so desperate, even a little effort will stand out; a big effort will go down in the history books. Either way, the UPA can’t afford to disappoint. Not only are its fortunes in the upcoming key polls for Kerala, West Bengal, Tamil Nadu and Assam at stake, but a budget perceived to be unsatisfactory could seriously imperil the remaining tenure of UPA-II.
The immediate comparison is inevitably with the 1991 budget—when faced with a crisis, the Congress party delivered. The big question is whether that magic can be recreated by the UPA 20 years later; after all, we have one common factor—Prime Minister Manmohan Singh. It is, as a Mint columnist recently pointed out, an interesting combination: in 1991, you had a politician as a prime minister (Narasimha Rao) and a technocrat (Singh) as the finance minister; this year, the roles are reversed.
A repeat performance may not be that easy to pull off.
For one, in 1991 the country was in a crisis of unprecedented proportions (which inevitably brings everyone together), having witnessed the assassination of Rajiv Gandhi midway through the polling phase even as an economic crisis accelerated. In contrast, the polity today is polarized; worse, sections of the government are working at cross purposes and sometimes even contradicting each other. If that weren’t bad enough, there is a fresh dose of distraction for the UPA: the National Advisory Council (NAC) under the leadership of Congress president Sonia Gandhi is increasingly sounding at variance with the government; on Saturday, NAC decided to challenge the government’s version of a Food Security Bill with a far more generous version of its own.
Second, considerable heavy lifting had already been done prior to the historic 1991 budget. Over the 1980s, the liberalization juggernaut had begun to gather steam and a section of the bureaucracy, a minority yet powerful grouping, had already come up with a blueprint for action, including de-licensing of industrial sectors. In fact, if Yashwant Sinha, finance minister of the short-lived regime of prime minister Chandra Shekhar, had succeeded in presenting a full budget (instead of the vote-on-account) much of the changes would have been in place earlier; the notion of public sector disinvestment first found mention in Sinha’s vote-on-account speech.
In this context, similar work, especially with respect to tax reforms, has preceded this budget too. While there is some predictability about the draft direct taxes code (DTC), the same can’t be said about the equally important single goods and services tax (GST). DTC was readied nearly two years back and a considerably diluted version was introduced in Parliament; it has since been referred to the standing committee. DTC was intended to provide stability to the tax environment. However, GST seems to have run aground with the Centre making the unreasonable demand that the states give up their taxation powers; GST would have for the first time economically unified the country and in the process nixed the tax rate-induced regional bias to growth.
Third, there is not much room for short-term manoeuvre for the finance minister in reordering his finances. Almost 80% of the annual expenditure is pre-empted either by rising debt-service obligations or commitments to ongoing programmes.
Finally, the problems—tackling inflation, corruption and jobs growth—require structural solutions. There is no short-term fix for any of these problems. The Mint-Synovate dipstick on the nation’s mood suggests that people too expect the same; it may be another matter that companies and analysts may want a “dream budget”. Politically, this solution is always very difficult to package; all the more so, when the UPA is facing a credibility deficit.
To sum up then, the odds are stacked against the government ahead of the budget. This is both a challenge and an opportunity. The markets seem to think it is the former. The finance minister has to prove them wrong.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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First Published: Mon, Feb 28 2011. 01 15 AM IST