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Budget balanced stimulus with maintaining a reasonable deficit

Budget balanced stimulus with maintaining a reasonable deficit
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First Published: Wed, Jul 08 2009. 01 12 AM IST

Policy view: Planning Commission deputy chairman Montek Singh Ahluwalia says the Budget has a clear sense of direction. Adam Berry / Bloomberg
Policy view: Planning Commission deputy chairman Montek Singh Ahluwalia says the Budget has a clear sense of direction. Adam Berry / Bloomberg
Updated: Wed, Jul 08 2009. 01 12 AM IST
New Delhi: Planning Commission deputy chairman Montek Singh Ahluwalia speaks in an interview about the first Budget of the Congress party-led United Progressive Alliance’s second stint in power. Edited excerpts:
James Lamont, the bureau chief of the ‘Financial Times’, said the Budget essentially is a tinkering exercise. It is a sort of budget you would expect right at the end of the term of a government, not a budget that reflects the powerful new mandate that the Congress party has just received.
Policy view: Planning Commission deputy chairman Montek Singh Ahluwalia says the Budget has a clear sense of direction. Adam Berry / Bloomberg
I don’t agree with that, of course. It is not the first time that I am disagreeing with what the Financial Times says. I think it is quite unreasonable to put on the Budget all kinds of unreasonable expectations... The real issue is, is it the right Budget for the present circumstances. I think you have to keep in mind...that these were very difficult times, and around the world, people are...expressing disappointment principally because there seems to be some completely irrational expectation that by a wave of the wand, difficulties will disappear, all problems would be solved by a whole lot of little bits of financial engineering in the Budget. That is not really possible. But I think the Budget does what the economy needed right now and that is the way you should look at it.
The Budget, instead of giving us a sense of vision, a policy statement and a direction, has given us a technical accounting exercise shorn of any inspiration...
I don’t agree with that at all; when you say a sense of direction, what can you read from what the Budget speech says? It clearly said that we are going for growth, getting back to a high growth path is our top priority, that we are in favour of inclusive growth, it’s the private investment that’s going to drive the growth process and said things like we need to do a lot in social sectors and infrastructure, and I think it laid out, in my view, a macroeconomic framework which makes a difficult balancing act between trying to give stimulus on one hand and maintaining a reasonable fiscal deficit.
Given that this is a start of a new government with an enormous mandate, a much bigger mandate it ever expected to have, this was a moment to signal, if not actually, take tough decisions, decisions to do for instance with scaling down subsidies, reining in the fiscal deficit... Those decisions were not clear.
We are in the middle of a global recession, so the most important thing is to get expenditure to stimulate the economy and you want signals to bring the fiscal deficit down, you cannot have everything. Your colleague earlier on was saying, people were expecting a cut in taxes, more expenditure and better investment in infrastructure and reduced fiscal deficit; it’s impossible. We have to make a choice and I would say that the broad direction is clear, inclusive growth, role of the private sector, very clear, where are we putting the money—social sectors and infrastructure, very clear; a lot of emphasis on public-private partnership in infrastructure... He has talked about even the fiscal deficit, he explained that it has to be high this year but he is going to bring it down in two years’ time. Isn’t that a direction?
The finance minister...has a document that he has presented that indicates how he intends to cut the deficit—1.5% each year for the next two years. Had that been put into the Budget speech the assurance would have been greater, the stock market wouldn’t have tanked and the sense of panic which you call reaction but others called disappointment wouldn’t have happened. Could he not have put the two together? Why didn’t he?
This is sort of getting into the nitty-gritty and detail. I think it is there in the Budget speech. You can always argue what in this huge mass of documents should we put in or not put in. I think most people recognize that the reason why you have a macroeconomic policy statement and this is not just a casual comment, the statement is there before Parliament; it is on the record; most knowledgeable people interested in what’s happening about the future or what is the road map have read those documents and they know that it has been said not only by the finance minister but by everybody that we do not intend to follow a path of fiscal profligacy...
It is not a weakness of the Budget. It is a weakness of the presentation of the government’s message... I just picked up fiscal deficit as one example. He had the answer. If he had given it at the right time, he would have had the right response.
I think the Budget is a complex, technical document. I suspect that it is true that in our system, announcing that you are going to reduce the fiscal deficit is not something that the particular audience that he was currently addressing, which is Parliament, is more interested in than many of the other things he said.
Except for the fact he knew that he was also speaking to the country, he knew he was live on television; he knew investors both in India and abroad would listen and respond.
No, let’s be clear. Investors don’t judge by what is put in the speech and what is not put. This issue of fiscal responsibility has been repeated ad nauseam by virtually everyone in the government. So they know that.
Let me take another example. Let’s come to disinvestment, which is another area where there were quite expectations that once again a road map would be laid out. If you give me a moment, I want to sketch the expectations out before we come to the disappointment he created. The President’s address had spoken about it. The Economic Survey had fixed a target at Rs25,000 crore. In fact, in an interview that you gave me for our sister channel, in Devil’s Advocate, you yourself had said that you believe disinvestment should be a) extensive b) the government needs to come up with a three-four-year schedule and the only limit as you saw it was 51%.
But once again on all of that the finance minister spoke by silence. He gave a sort of indication that disinvestment was going to happen. He said that people ought to have a right to own shares in their companies and then he stopped. Suddenly, when the road map was needed, an assurance was wanted, he kept quiet.
I can well believe that in order to prepare the road map, they just need a little bit more time. Presumably, the department of disinvestment will work on the road map, go to the cabinet, get it approved and put it through.
I have to say that we seem to have developed an unnecessary hype about the Budget or the Budget speech. It is almost as if, if it isn’t in the Budget it is not going to happen in the rest of the year. This is just plain wrong.
You have made two very important points, you have made one point that perhaps the finance ministry or the disinvestment department didn’t have enough time to identify the particular companies where disinvestment should take place. The second point you made was about the unnecessary hype that was associated with the Budget. Let’s take them apart because actually on the first, the final thing is that a few hours after the finance minister sat down in Parliament and the finance secretary Mr. (Ashok) Chawla began talking on television, it became clear that they had actually identified the companies they wanted to disinvest. Mr. Chawla went on to say in the evening that Oil India and NHPC could be seeing disinvestment within weeks, and have identified six other companies that will see disinvestment. If the finance minister had put that into his speech, he would have once again given confidence and assurance?
I can’t answer exactly what led to something being included in a speech as opposed to be clarified later on. It’s possible that as a matter of propriety, he wanted to have that approved by the cabinet. Remember the department of disinvestment is located in the finance ministry, but is doing disinvestments for companies which are located in other ministries, so that’s why, normally, they would take a note to the cabinet and the cabinet would then approve.
Isn’t this a very peculiar division of labour between the finance minister and the finance secretary, the finance minster in the morning speaking in Parliament disappoints the country, the finance secretary speaking on television reassures the country?
There is special sanctity to what is announced by the finance minister as part of the Budget speech because he is speaking to Parliament, so I can well understand the situation where the finance minister may say if it hasn’t been approved by the cabinet, let me not put it in the Budget speech whereas the finance secretary is saying this is what we plan to take to cabinet and so that’s not in itself so surprising.
One of the things that people were expecting was some indication of raising insurance caps, raising FDI (foreign direct investment) caps in general. As you know that was promised five years ago by Mr. (P.) Chidambaram (former finance minister) in his first Budget and it hasn’t been delivered upon.
On the insurance cap, the Bill is somewhere in Parliament. So, I don’t know if there was anything more to say.
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First Published: Wed, Jul 08 2009. 01 12 AM IST