There has not been, in recent times, a more complex economic situation combined with a more volatile political one for the government to present the budget. It is not a situation of economic crisis—far from it—nor is it quite the situation of political instability, but—and this is what makes it critical—it can quickly go that way.
The overall situation of pervasive uncertainty and drift that engulfs the economy and the polity is far more difficult and complex to deal with than a crisis. It has the potential to spiral into a crisis of the political economy, if not addressed systematically and systemically.
The budget could have initiated definitive action on both fronts. On the economy, simply because it is the only economic policy document of the government. On the political front, not so much because of the budget, but because of the man presenting it—Pranab Mukherjee, a seasoned politician and the main political troubleshooter of the ruling coalition.
To rephrase an old adage in the budgetary context, does the budget make the finance minister important or does the finance minister make the budget important? Clearly, in this case, it is the latter; it is Mukherjee being the finance minister that made this budget significant.
In the current context, there are three elements in the budget that one needs to look at in order to assess it. First is the political underpinning of the budget. It could and should have been the United Progressive Alliance’s (UPA) national budget, but it has remained the finance ministry’s Union Budget. In a sense, the budget has failed to leverage one of the UPA’s biggest assets: its finance minister’s political acumen and immense experience. There is no political message that comes through.
One expected a series of measures or a definitive road map about how the governance deficit can be and will be addressed. Or how the crisis of corruption, which has shaken the confidence of corporates and tarnished the image among the foreign investors, would be addressed.
Indeed, the minister did set this objective right at the start of his speech: “I see the Budget 2011-2012 as a transition towards a more transparent and result-oriented economic management system in India.” The problem is that having said that, he didn’t back it with any credible plan. The closest that he comes to addressing the corruption/governance issue is to recall the earlier initiatives of securing a membership of the Financial Action Task Force of G-20 and concluding of tax information exchange agreements and double taxation avoidance agreements. Quite apart from the fact that these are not new, these measure don’t add up to a strategy to improve transparency. In fact, the minister spent more time talking endlessly on trivialities such as reducing duty on bamboo for agarbattis, lactose for homeopathic medicines, and on sanitary napkins and diapers.
The second is the economic strategy underlying the budget. An important component of post-reform budgets ought to be the strategy of the government to behave as an important constituent of the global economy. Quite apart from the fact that the economy is far more integrated with the rest of the world than it has ever been before, the current global situation, both economic and political, warrants a strategy if one has to maximize the country’s benefit from this engagement.
But other than ending his speech with the assertion that “India as an emerging economy, with a voice on the global stage”, there is not even a beep from the minister on how the fiscal arithmetic of the budget and growth prospects can be jeopardized by, for instance, the tumultuous changes taking place in the Arab world—let alone making provisions for it or building contingency plans or a medium-term strategy.
The budget is also silent on how the retarded and fragile global recovery would have a bearing on India’s growth prospects. Even the niggling structural problems in the global economy that are emerging have been ignored. In this sense, it is an autarchic budget for a globalized economy.
Third is the fiscal strategy, which is quite fuzzy, and in fact goes quite against the monetary policy stance to a large extent. The expenditure compression that was warranted has not been done. It would have been worthwhile to focus on delivery and expenditure management.
The fiscal policy underlying the budget may not be expansionary, but it is certainly not contractionary either. At best, it can be classified as a non-expansionary fiscal stance. This does nothing to either further growth or rein in inflation except put greater onus and pressure on monetary policy to rein in inflation.
The fiscal stance of the budget seems to have been driven around one number, the size of borrowings that has been kept at the same level as last year. The fiscal deficit target has been more than met, but that cannot be an end in itself
Notwithstanding the fact that this number is highly suspect— considering that the impact of oil prices as is evident in the subsidy number, which is Rs20,000 crore less than last year—there is also a misplaced belief that a lower level of fiscal deficit is going to have a salutary impact on interest rates as it would have had in a closed time. This is far from the truth.
The structure of expenditure, with a heavy bias towards social security spending, in the absence of any attempt to ease supply-side constraints, is bound to continue exercising inflationary pressures. Along with the additional indirect tax collection, the budget is potentially inflationary.
Above all, the budget ought to have taken cognizance of how spiralling oil prices will impair growth and how the finance ministry intents to deal with it. At what level of oil prices do the budget numbers hold? The budget numbers and the implied growth projections can and are more likely than not to go awry because of the emerging oil scenario, politically as well as economically. Given the fact that much of the fiscal arithmetic is based on growth-led tax buoyancy, if growth slows due a creeping oil shock, it will automatically create a fiscal imbalance.
In corporate risk terminology, the budget has a huge concentration risk as it bets exclusively on domestic growth. The budget would have done well to outline a plan for strategic ownership of natural resources and assets such as overseas oil blocks. In today’s situation, oil prices can’t be left an imponderable.
Interestingly, the focus of the budget does not seem to be not on the real economy as it ought to have been, but on the financial sector. There are some significant changes for the debt market, equity markets as well as intermediaries such as banks. All these measures will have a short-term impact on sentiment, but will not change the medium- and long-term dynamic.
At the end of the day, it is a budget that seems to have been designed with the policy instruments of the 1970s, drafted in the language of the 1980s and delivered in the context of 2011! Too much of the budget effort and thought has been given to procedural matters and no strategic direction has been provided, either to the government or the market participants.
Haseeb A.Drabu, Economist