The Budget that became A Budgive
The Finance Minister’s job is most
lonely and difficult. He has to address so many concerns, balance so
many competing interests, contend with so many pressure groups. He has
to deal with exaggerated expectations on what the Budget can and must
do. He has to marry continuity with change. Jaswant Singh’s maiden Budget
has a number of positive features. There is the promise of a major simplification
of tax procedures. Customs duty reductions continue and excise duties
have been cut boldly. There are tough new reforms as the reduction in
fertiliser subsidy and dereservation of small-scale industry. The needs
of states have been sought to be balanced with those of the centre.
Specific key sectors like textiles have been subject to clean-up. But
at the end of the day, the FM’s offerings raise many more basic questions
than they answer.
A Budget should be judged in its entirety. Nitpicking serves no worthwhile
purpose other than partisan debating points. There could be some quarrel
over the assumptions made-instance, how realistic is the implicit 6.8%
rate of real GDP growth assumed for 2003/04? But even here, every FM
must be given the benefit of the doubt since the Budget is also a statement
of hope. The only constructive way in which a Budget must be criticised,
if that is called for especially by North Block alumni, is in terms
of its conceptual underpinnings.
It is this Budget’s analytical framework-or more precisely, the lack
of it-that is disturbing. Forget that there are unprecedented open-ended
expenditure commitments. Forget that direct tax laws have got further
entangled. Forget that pre-1991 type lobbying appears to have reared
its head once again in the fixation of duty rates. Most crucially, the
fiscal will is on the wane. Obviously, the new theology is that with
increasing growth and with decreasing interest rates, the fiscal deficit
can be managed. The comfort level in North Block is all the more since
India’s external position is very good and we are actually running a
current account surplus, thanks to booming remittances and software
export earnings. The fact that we have a government-owned banking sector
with a voracious appetite for government securities is another safety
net.
India’s most serious economic problem that is holding back both growth
and investment remains the deficit at the Centre and in states. Deficits
are unsustainably high and worse they arise not out of productive investment
expenditure but largely from government’s expenditure on interest payments,
subsidies, public sector losses, defence and salaries and pensions.
Almost three-fourths of the centre’s borrowings are to finance its consumption
expenditure. Yes, for the moment because of easy liquidity and sluggish
credit demand, government borrowings from the market to meet the deficit
are not “crowding out” private investment. But the poor quality of government
expenditure for which the borrowing is taking place is definitely elbowing
out productive public investment itself that could be a powerful stimulus
to growth.
There are limits to the southward movement of interest rates, especially
when industrial growth gets into the 8-10% trajectory on which much
of the Budget arithmetic is predicated. And in any case, real rates
of interest cannot be divorced from real rates of economic growth. Keynes
is often invoked to justify deficit financing forgetting that he had
advocated increased public spending during the Great Depression of the
1930s when western governments had made a fetish of balanced budgets.
To talk of deficit financing when the overall fiscal deficit in the
economy is already over 10% of GDP (and household financial savings
are around 11% of GDP) makes little sense.
The encomiums he has received so far for what is at best a workmanlike
effort could tempt the FM to become a legend in his own mind. Hopefully,
once that sheen wears off, he will begin to address the Budget’s manifest
weaknesses. The real work starts now.
