Indian government budgets are part accounting and part theatre. Pranab Mukherjee has underwhelmed us on both counts in the first Union Budget of the new United Progressive Alliance (UPA) government. It is almost as if he has absent-mindedly put out an election-year budget just months after the general election has actually been won.
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First, the accounting part: The mess in public finances has gotten even worse. India could soon be a mere hop, skip and jump away from a huge economic muddle.
Mukherjee has taken a huge fiscal gamble, though in all probability a well-informed one. The Indian economy is in trouble, with both consumer demand and corporate investment sputtering. So, higher government spending is the only pillar holding up the shaky economy right now. India is just one of the many economies around the world where governments have stepped in to support growth or prevent deeper recessions.
But the Indian economy could be in deep trouble if his gamble does not pay off.
The finance minister has ramped up spending while assuming that growth in tax revenues will be anaemic because of a slowing economy. The resulting fiscal deficit— estimated at 6.8% of gross domestic product (GDP) in 2009-10—is dangerously high. Bond traders have already started pushing up interest rates on government bonds because of fears that extra borrowing by the government will crowd out private sector borrowers.
A further fiscal slippage could take India into hazardous territory and invite a downgrade of our debt by global credit rating agencies. That will likely make it difficult for Indian companies to raise money abroad, putting further pressure on the domestic financial system. India could then be sucked into a whirlpool.
The government’s unarticulated assumption seems to be that all the extra money it has showered on the economy will allow growth to bloom and eventually lead to higher tax revenues. More money in the treasury will eventually allow the finance ministry to cut the fiscal deficit and bring public finances back on track.
But there could be serious trouble ahead in case growth does not recover soon.
However, the finance minister blew up a wonderful chance to use his pulpit to lay out a road map for future reforms that can take India’s growth rate back to 9%. What he did announce—the introduction of a national goods and services tax from 1 April 2010 or the finalization of a new direct tax code—has been on the reforms agenda for long enough not to take anybody by surprise.
Illustration: Jayachandran / Mint
The stock markets have been shocked that the new Budget does not have too many reform proposals to lift spirits. It has been our view ever since the UPA was re-elected that brokerages and investment banks were betting too heavily on big-bang reforms.
The optimistic conclusions drawn from the Economic Survey 2008-09 released last week missed the essential point: the survey is written by economists and budgets are made by politicians.
There are undoubtedly bits and pieces of the Budget that will gladden hearts, especially the removal of the income-tax surcharge and the elimination of mindless levies such as the fringe benefit tax and the commodities transaction tax.
But in terms of concrete proposals on the three challenges identified by Mukherjee in his Budget speech— leading the economy back to a high-growth orbit, deepening and broadening the agenda for inclusive development and improving governance—this Budget has been an utter failure, unless you equate inclusive development with higher transfer payments to the poor.
True inclusive development entails moving millions out of low-productivity rural jobs to factory jobs where they have access to better tools and the global market.
The process of moving people into modern sectors would mean reforms in critical areas such as labour laws, education, controls on job creating activities such as retailing and housing, etc. There is nothing at all in the Budget about these well-known problems. Forget firm proposals, there are not even stray statements that this UPA government wishes to address these problems.
In fact, Budget 2009-10 is in many important facets a throwback to an earlier era. Mukherjee quoted the Mauryan era sage and political strategist Kautilya in his Budget speech; he did so in 1984 as well, when he had presented his last budget in the pre-reforms era.
The coincidence is perhaps a telling one.
In its dependence on statist solutions, fiscal indiscipline, aimless tinkering and even in the defence of Indira Gandhi’s decision to nationalize banks in July 1969, Budget 2009-10 has brought back memories of a budget from the 1980s.
Will Pranab Mukherjee’s gamble pay off or is India headed for a fiscal crisis? Tell us at firstname.lastname@example.org