BackRekindling hope for investors
Chidambaram’s budget is a credible attempt to restore macroeconomic stability
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Finance minister P. Chidambaram’s budget is a credible attempt to restore macroeconomic stability and rekindle investor sentiment. The challenge of reconciling growth with fiscal rectitude and populism with macro-stability was not easy. Reining in inflationary expectations and enabling the central bank to adopt a more accommodative credit policy are a prerequisite for new corporate investment.
The budget was presented against a gloomy backdrop. Few countries have experienced such a rapid decline in economic growth as India, from nearly 9% to an estimated 5% this fiscal year. The current account deficit is at 4.6% of gross domestic product (GDP) and the fiscal deficit at 5.2% of GDP for the central government and 8% for the Union as a whole, requiring difficult policy corrections.
In this backdrop, the plan to improve exports and entice inward capital flows is audacious. Actions over the last six months by way of expenditure compression, raising prices of petrol and diesel and a plan to reduce subsidies as well as better targeting of their beneficiaries lend credibility to the new promises contained in the budget. Raising revenues in difficult times is never easy. Instead of draconian new tax measures, improving tax coverage and enforcement, coupled with a modest surcharge on the super-rich, as well as corporates is a responsible course to take.
Still, there are doubts whether the strategy outlined in the budget will enable us to accelerate from 5% growth to an estimated pace of 6.1-6.7% in the coming year. This is a doable target provided we are not overtaken by complacency and the assumptions in the budget are realized over the next few months.
What are the key assumptions? First and foremost, the realization of the hope that critical tax reforms secure parliamentary approval. The finance minister has mentioned that, based on consensus, the revised direct taxes code will be introduced during the current session of Parliament. Also, in the hope and belief that a consensus on the goods and services tax (GST) will emerge, he has provided ₹ 9,000 crore for payment to states for enabling the constitutional amendment Bill to be brought to Parliament. Both these will test the negotiating skills of the finance minister.
Second, the provisions made for subsidies are likely to be significantly revised upward. Capping subsidies at expected levels will test the resilience of the finance minister, particularly when electoral pressures will keep rising over the coming months. It also assumes that the programme for the adjustment of diesel prices will remain uninterrupted and sooner or later the kerosene subsidy will receive a similar treatment. A correction of fertilizer prices is also overdue.
Traversing the path of subsidy management without giving in will be a testing challenge.
Third, foreign investor sentiment remains frayed. An early settlement of the tax dispute with Vodafone Group Plc and other multinationals being pursued by the over-zealous tax department would, no doubt, be helpful. The enactment of legislation relating to the insurance and pensions sectors and the passage of the Companies law, however, rest on a bipartisan consensus, which has eluded the government so far.
Fourth, the efficacy of measures to attract foreign institutional investment and foreign direct investment at a time when global economic conditions remain subdued remains uncertain. Stock market behaviour is driven both by domestic and external circumstances. But it is only when the stock market is buoyant and investors upbeat that the government can meet its disinvestment targets.
It is difficult in the ninth year of your term to pretend that you are just starting. A lot of time has been wasted, but that does not mean that the time left before the next elections should not be purposefully used. Credible action began six months ago, and the budget is a continuation of the process. There is more than a glimmer of hope that the worst may be over for the Indian economy and better times lie ahead. Reversing expectations is never easy. Does the budget leave us optimistic about the future? I would say it certainly leaves us less pessimistic. It is in that sense that I believe it seeks to rekindle hope.
N.K. Singh is former secretary to the prime minister
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