Ministries and markets are not the best of bedfellows anywhere; more so in India. There was a time when the finance ministry would not only lord over the markets, but would also be dismissive about their ethics and economics. From being thought of as akin to casinos, they were seen as being so marginal to the economy that a finance minister proudly said that he was not “losing sleep over the troubles in the markets”. Indeed, one minister publicly announced that he inferred more about macroeconomic trends in the “Delhi Khan market than the stock markets in Mumbai”.
Now the markets are getting back at the ministry. For it is the financial markets that deliver the ultimate judgement on budgets. Finance ministers, even as they speak, have an eye on how the Sensex has reacted. From being the “victims of the budget makers” in the 1980s, financial markets have become the “adjudicators of the Union budgets”.
Also Read Haseeb A Drabu’s earlier columns
This change has been brought about not only by the rise to dominance of financial markets, but also the growing disempowerment of the budget. As I argued in my last column, the Union government is no longer the biggest spender nor the biggest investor in the economy.
Over the years of reforms, the government has moved away from being the owner, regulator and player. Today, the regulatory system is largely independent of the ministry. Also, monetary policy has to a large extent replaced fiscal policy as the most potent weapon of economic management. Markets now look to Mint Street rather than Raisna Hill.
Not only have markets grown in size, but their structure has also changed significantly. For one, government institutions are no longer the big daddies of the ring. More importantly, linkages between domestic and global financial markets have meant that foreign institutional investors are today the prime movers.
A corollary is that markets respond more to a drop in the Dow Jones index than to national deficits. Similarly, they now respond not to the absolute level of growth, but to its relative rate. Foreign inflows don’t depend on just how well or badly the Indian economy performs; it is about how well it does relative to others.
In other words, the Union budget in its present form can give little to the markets by way of substance or sentiment. So, what should the budget do to make itself relevant? Is it time to look for a new approach in the budget to relate to the new economy and the markets—one that is in line with the country’s emerging needs and strength?
In addition to doing the routine plumbing work on expenditure accounting and its better targeting, and making taxation more hygienic, the finance minister must make the budget a strategy document: Not so much about fiscal strategy, but an overall national economic strategy that responds to medium- and long-term constraints.
For instance, the biggest problem facing the country today is the lack of natural resources. India is not a superbly resource-rich country, and its battle with China will ultimately be decided on the access that it gets to resources—be it ore, coal or gas.
No Indian company—and all the leading companies of India are commodity firms—can individually fight the sovereign in the international markets. The need to address the current situation in the global commodity markets, which is beginning to take geopolitical overtones, is imperative. Already, there are lobbying efforts for a pan-European strategy for raw materials under the aegis of the European Union to counter the Chinese, and attempts to get exclusive access to the African markets. At a time when protectionist murmurs haven’t quite died, this situation can quickly get out of hand.
As such, the “natural resource deficit” of India, as you may like to call it, should engage the mind of the finance minister more than the fiscal deficit. In fact, part B of the budget should be about the strategic thinking of the government.
As far as part A is concerned, the information overload on a daily, weekly, fortnightly and quarterly basis has made the annual statistics a bit meaningless. The review of the economy that the minister does will have no new number or nuance. It will be far better if, at least this time around, he presents not an economic review but a governance report.
In part A, the minister should identify major capacity deficits in governance practices and institutions, and recommend initiatives to address them. The emphasis should be on how the government intends to strengthen the legitimacy and effectiveness of policymaking in areas that are causing a systemic crisis.
This will be a huge booster not just for the markets, but all stakeholders.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comment at firstname.lastname@example.org