This Budget has to be assessed in terms of five Ms: the mind of the finance minister; the message that the government wants to communicate through the Budget; the method in which the finance minister seeks to implement it; the mechanism through which the Budget will work its way into the economic system; and finally the macroeconomics that underlies the Budget estimates.
There is a distinct sense that there is uncertainty in the mind of the finance minister about what is going to happen in the next three quarters. As such, it is a Budget for uncertain times. And quite rightly so. Realistically speaking, the minister had no choice, as the Budget was bound to be conditioned by the global circumstances more than the mind of the finance minister. Policy adventurism at this time could have been very dangerous. Policy has to be worked out on the basis of not what is likely to happen, but what could happen. It can be said that the mindset is that of the 1970s: Cautious and wary of the markets and international environment.
The message, though, is clearly of the 1990s: Reforms are the only way forward. It is only a question of pacing them. The big message, loud and clear, is that the government believes that reforms are the only way for ensuring long-term inclusive growth. The stage has been set for direct tax reforms with specific action on simplifications and increase in the exemption limits. The commitment on a goods and services tax, or GST, is a big measure whose significance has not been adequately appreciated. Similarly, a big reform, which can be seen as a new and innovative way of financial inclusion, is the government’s intention to broaden the equity ownership base in the country by reducing the threshold for promoter-owned equity. This step, if carried out properly, holds enormous promise for financial inclusion. This, along with the liberalization on pension funds, holds promise for equity markets and makes them more attractive than mutual funds.
Haseeb A Drabu, Chairman, Jammu and Kashmir Bank Ltd. Ramesh Pathania / Mint
In terms of the method, it is a Budget of uncertainty. This is why all divestment has been deferred; there was no intent expressed on the banking and financial sector, especially insurance. To a large extent this is prudent. Also, the government has chosen continuity in so far as it has continued to do what worked for it in the Budget of 2008-09. So, everything has been extended—be it the debt waiver, interest subvention to agriculture and to exports, or export credit guarantee corporation (ECGC) cover—to 2010.
The other aspect of method is that it is an expenditure-oriented Budget with high incidence of revenue expenditure. In these times, the real issue is not the size of the fiscal deficit. In the current environment, the 6.2% can perhaps be justified; it is the structure of the fiscal deficit that is the problem. The revenue deficit accounts for nearly 80% of the fiscal deficit. Incrementally, this will be more than 100%. The primary account would have now gone into a deficit. Add to this the states’ fiscal deficit of 4%, primarily incurred in revenue expenditure. This is the method of budgetary management of the 1980s.
In terms of mechanics, the sectors identified as prime drivers, and correctly so, are agriculture and infrastructure. Both have been binding constraints on growth, and even as the focus in the short term may be consumption drivers, they will facilitate and induce investment in the medium term. In terms of a specific measure, the really big initiative that will get banks to finance long duration infrastructural projects is the move to formalize and institutionalize takeout financing. If India Infrastructure Finance Co. Ltd does work out the modalities for refinancing 60% of bank lending to PPP (public-private partnership) infrastructure projects, this will give a huge fillip not only to infrastructure but also to a particular mode of organization, i.e., PPPs.
The underlying macroeconomics of the Budget is confusing. At one level, current expenditure or consumption is seen as the driver of economic revival. The way this has been distributed and structured is bound to have an adverse impact on the savings rate in the economy. This, along with the fact that the Budget pursues an extraordinarily expansionary fiscal policy, even after two earlier fiscal stimuli, and with a very loose monetary policy, will force the monetary policy to pick up the fiscal slag. The Reserve Bank will have no option but to pursue a tighter monetary policy in the third quarter when the busy season credit policy will be announced. By then the demand would have picked up and a suboptimal monsoon could have created an adverse macroeconomic climate.
As such, there is bound to be pressure on interest rates. This will increase the cost of borrowing for everyone, including the government. And that will have an impact on the credit offtake and private investment scenario. Add to this the supply of government paper and the way bond markets will absorb it, and it is clear that we are looking at interest rate hardening in the third quarter. This could have a significant impact on growth prospects and the 7% target looks unachievable. This will set in motion a vicious circle where the budgetary numbers eight months from now could spiral out of control.
All told, the budgetary numbers were expected, but the language was not. It was expected of the finance minister to show greater concern on the fiscal situation and outline a road map for restoring fiscal balance. This has not happened. The reason why markets tanked seems to be that they expected a branded chocolate, but have been served a piece of unbranded sandesh
Haseeb A. Drabu is the chairman and chief executive of Jammu and Kashmir Bank. The views are his own and don’t necessarily reflect the views of the organization he works for. Respond to this column at email@example.com