Media and academic criticisms of the interim budget can broadly be classified into three major streams. The first set consists of an effort to fault the finance minister and the government for not announcing any relief initially, and announcing a slew of tax cuts at the end of the debate. The criticism focuses on inconsistency, internal contradictions in government, and lack of transparency. After all, if there is an economic problem, why would the government not want to share it with citizens? All other countries are being forthright with their citizens.
The second set of critics focus on inconsistency in the numbers, arguing that the fiscal deficit is far higher than that reported, and that the additional borrowing has been used for revenue expenditure, not for investment, and that a substantial portion of the so-called stimulus package is actually for subsidies to shore up the balance sheets of government entities.
The third stream of criticism has been about the effects of the budgetary relief and the earlier stimulus packages on the economy, but has consisted largely of those sections that had hoped for something for themselves and have been disappointed.
Surprisingly, there has been very little comment on the nature of the stimulus packages, the content, and the impact of these on the economic situation in the short and medium term. The performance of the acting finance minister was a bit like the poem about the boy who stood on the burning deck when all around him had fled, and his chieftain was incapacitated—he had nowhere to go.
The story started with the former finance minister repeatedly denying that there was anything wrong with the economy and asserting that fundamentals were strong, and we would have 7-8% growth and so on— a bit like Nero fiddling when Rome was burning. After all, to a person who had repeatedly been asserting that inflation was imported and was due to global phenomena, it should have been obvious that the downturn would also find its way into the country.
We can best say that he was ill-advised, or that he believed it himself. The consequence was that he led the government to believe it, and the government has been in a state of denial since August. The agricultural debt waiver, greater allocations for the national rural employment guarantee scheme, more subsidies, pay increases for government staff, etc. all continued to add fuel to the fire of revenue deficit, without doing anything at all for the economy that had started to slide downhill. Signs of downturn were evident in the dropping of exports, lack of export credit, large unemployment in the exports sector, slowing of infrastructure projects due to lack of equity financing from secondary markets, margin calls on stressed assets, and the collapse of real estate prices.
None of the efforts of the government addressed any of these problems, except the lowering of excise duties in the second stimulus package. It was left to RBI to announce a succession of monetary measures in panic. The easing of liquidity was intended to address all the problems that the government did not want to talk or think about.
It was perhaps argued that with a good agricultural harvest, high stock of foodgrains with the government, further sops to the rural sector would ensure smooth passage through the elections, and that other problems could be taken care of later. This is what the interim budget attempted to do.
This brings us to the question that everyone is asking—when will the stimulus package stimulate the economy? I think only when the economy stimulates itself, that is to say confidence and demand revives, and that would have had little to do with these packages. If only the government had realized the serious nature of the problem, so much could have been done differently.
As an example, orders could have been awarded for half a dozen power stations to the National Thermal Power Corp., with equipment from Bharat Heavy Electricals Ltd,and coal from Coal India, to be financed out of their balance sheets and public sector bank financing. This would have been a simple approach to an off-budget stimulus that would have enabled the wheels of manufacturing, transportation and capital intensive industries to start turning. In the 1980s, this approach enabled a large infrastructural capital base to be created—it was just necessary to dust up those files and follow a similar path.
A lot of people feel that the response of the government to the crisis has been inept, and has only focused on avoiding any admission of stress, hoping to carry through until the elections with ad hoc measures to band-aid over the problems.
They also feel that perhaps the government does not know what to do. As the Red Queen tells Alice, if you don’t know where you are going, any road will take you there.
S. Narayan is a former finance secretary and economic adviser to the prime minister. Comments are welcome at firstname.lastname@example.org