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India’s budget blowout

India’s budget blowout
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First Published: Tue, Jul 07 2009. 10 31 PM IST
Updated: Tue, Jul 07 2009. 10 31 PM IST
The Congress was re-elected in May on a promise of economic populism that the country can’t afford. On Monday, the government delivered on that promise. This is bad news for India, and especially for its poorest citizens.
The Budget outlines three priorities: 9% economic growth, “inclusive development” and better public services. It would achieve these outcomes by boosting spending 36% to Rs10.2 trillion, mostly on handouts and infrastructure. No major public sector rationalization or private sector liberalization was announced.
This is in effect a revival of India’s socialist past and a rejection of the 1990s reforms that gave India the best kind of “inclusiveness”: economic growth. Finance minister Pranab Mukherjee was explicit about this political sea change: “Aam aadmi” is “now the focus of all our programmes and schemes,” he said. He extended loan and job guarantees to the poor, programmes that are already eating up around 1.3% of gross domestic product (GDP) and will only grow.
The Budget is in line with party leader Sonia Gandhi’s emphasis on populism, but it’s especially disappointing given the track record of Prime Minister Manmohan Singh who, once upon a time, was an economic reformer. Singh’s boosters claimed his lacklustre reform record in the Congress’ first term was because he had to rely on Left-leaning allies. Now, the Congress has dumped those partners—and there is no excuse for moving the country backwards.
The irony is that by extending the government’s influence in the agricultural sector, which employs 60% of the workforce, New Delhi is retarding its growth. India’s challenge is to move its poor from the farm to the factory. The more the government shovels subsidies and free rice at farmers, the less willing they’ll be to find other means of employment. High tariffs and barriers to entry have also stunted competition and innovation.
Mukherjee seems to understand some of these ideas, at least in principle. He said private investment was “the principal growth driver” of India’s boom years. Yet he did nothing to ease private industry’s tax burden, cut regulatory red tape or liberalize the country’s restrictive foreign direct investment regime. He also praised Indira Gandhi’s 1969 bank nationalization as “wise and visionary” and “an inspiration”. So much for freeing up capital flows at a time when credit is contracting.
New Delhi’s largesse will have fiscal consequences. Since the government isn’t cutting back, Mukherjee proposes to sell slices of government public companies to help finance this spending spree. But the bulk of the funding will come from bond sales and tax hikes, crowding out private investment. Meanwhile, economists project the outlay will send the fiscal deficit soaring to at least 10% of GDP—the largest in almost two decades.
There were a few good ideas. Mukherjee promised to simplify the tax code, but he’s layering on more taxes before he does so, proposing, among other things, a goods and services tax. India desperately needs better infrastructure to facilitate trade, so Mukherjee’s plan to increase spending for highways, railroads and urban public works is welcome. But the broader theme of spending without constraints or accompanying liberalization is a setback for growth. Mukherjee said “the road ahead will not be easy”. He is not making it any easier.
THE WALL STREET JOURNAL
Edited excerpts. Comment at otherviews@livemint.com
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First Published: Tue, Jul 07 2009. 10 31 PM IST