More than a decade ago, when policy was being tweaked to allow the entry of foreign institutional investors (FIIs), Abhijit Sen, now a member of the Planning Commission and then a professor at Jawaharlal Nehru University, had told me in the context of a story that future finance ministers would have to keep an eye out for foreign investors and stock markets while presenting the annual budget.
His prescience has been borne out time and again as several budgets have been trashed by the markets, in which FIIs are more than a significant presence today. Often, the market reaction has been at variance with the contents of the budgets. And, more often than not, the immediate verdict endures. Is this shock-and-awe approach a fair way of analysing the true import of a budget? Absolutely not.
Finance minister Pranab Mukherjee’s fourth effort, his first after 25 years, was similarly dismissed by the markets. He can take heart. A Morgan Stanley research document shows that the market decline in reaction to the Budget was only the third worst in the last 18 years. What it did was to compare the closing value of the stock index on Budget day to what prevailed a month ago, and found that the contraction this year was 7%, compared with 8.2% in 2007 (P. Chidambaram) and 9.1% in 1998 (Yashwant Sinha). Significantly, the so-called dream budget of 1997, strong on rhetoric and vision (the two factors analysts claim are missing in this year’s Budget), led to a contraction of 1.4%.
Critics claim analysts and investors were fed a dream by the wish list on economic reforms included in the Economic Survey that preceded the Budget’s presentation. Far from it. The survey is never meant to serve up hints on the Budget. Instead, it is an economic report card of the year preceding the presentation of the budget, and also lays down what it believes to be the economic palliatives. At best, it sets the macroeconomic context and is a vision statement.
So, what do we make of the stock market response to the budget? We obviously can’t ignore it. Having said that, one needs to understand that there are many things that drive market movements. If it was indeed so easy to talk up the stock markets, then Mukherjee and his predecessors would have done so.
So, it is important to view the stock market decline in perspective and not let it dominate any analysis. It is similar to the reactions of consumers, investors, farmers and so on, all of which need to be taken into account when summing up a response to the budget.
Also Read Anil Padmanabhan’s earlier columns
Like any episodic event, the reaction is best assessed after a lag. Especially in this day and age of electronic media, reactions tend to be hyperbolic and often skew our immediate analysis. Even Mukherjee’s Budget was widely reviled on the first day, only for some analysts and commentators to do a flip-flop a day later. A fair judgement would have to wait till at least the end of this year; it would give us sufficient time to see whether the finance minister was indeed fair in making the assumptions underlying the Budget or not.
Seen in this context, the opinion on several budgets presented in the last 18 years should be revisited. However, since history is something we tend to take for granted in this country, very often those condemned stay in the dustbin of history. It is difficult to pick any one budget or finance minister. But as an example, Sinha is perfect. Like Mukherjee, he, too, has had two stints as a finance minister. One, before the acceleration of economic reforms was initiated in 1991, and two, as a member of the Bharatiya Janata Party-led National Democratic Alliance government.
Few know that Sinha was the one who introduced the notion of disinvestment of public sector shareholdings in the reforms lexicon, when he presented his interim budget way back in 1991. But, it was in the 1999 budget that he really excelled.
It was important because it accelerated tax reforms, set the ball rolling on interest rate rationalization and, most importantly, triggered the housing boom underlying the unprecedented economic surge in the new millennium. The budget showed a primary surplus (fiscal deficit less interest payments), which overnight enabled the Reserve Bank of India to lower interest rates, laying the basis for the consumer credit boom that followed. Further, Sinha ordained more tax rationalization initiatives and effected a sharp reduction in customs duties; he threw in tax incentives to mutual funds, making them attractive investment destinations for small investors. It was, however, the tax incentives that he doled out to housing that not only stoked middle class aspirations, but set off the longest construction boom in the country ever.
It is not as if one budget made all the difference. Policy, especially in a democratic set-up such as India, is a continuous process. But the point is that we often tend to overlook the obvious, and it may well be the case with Mukherjee.
Finally, it has to be borne in mind that this is a different kind of coalition. The Congress has 206 members and is hence very dominant. In the past, the leading party had to inevitably contend with restive allies and the finance minister often became the sole proponent of reforms. By including a statement of intent in the budget, reluctant cabinet colleagues were forced to fall in line. This strategy is no longer relevant.
So, only time will tell whether Mukherjee was indeed wrong, or someone who, like Sinha, was misjudged.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org