In 2016, the Nifty has dropped 11.7 per cent, the rupee has dropped 3.9 per cent against the dollar and foreign investors have taken an estimated $3 billion out of the country. The Economic Survey reiterates the established government line that macroeconomic conditions are still fine and growth is above seven per cent. If, as many independent scholars suggest, the economy is not really growing that fast, the macroeconomic setting for the Budget diverges from that portrayed in the Survey. In this case, the Budget speech needs to do much more on reforms. When the fiscal deficit is divided by GDP, this ratio will be distorted by an exaggerated value for GDP. China has reached a point where the private sector strongly mistrusts the government, owing to the loss of credibility of data and official statements over the years. The Indian government should be mindful of this danger.
Why have the promised "good days" not materialised? Arguably, the central leadership lacks commitment to a market economy in a liberal democracy with the rule of law. There is insufficient clarity on objectives; a shortage of fully worked out programmes for change; and a lack of detail on the required legislative and executive reforms. Such a situation unfortunately produces programmes that aim more towards grabbing newspaper headlines, instead of bringing about transformative structural reforms. The Survey does indeed include a high-level discussion of issues with ideas, with useful new research and arguments. However, given this larger political context, it struggles to lay out a conceptual framework for where India has to go or the tangible legislative and executive actions that have to be taken.
The Survey has rightly highlighted the adverse impact of the banking crisis upon the economy. When banks are stressed, they lend less, which holds back GDP. The taxpayer is going to be asked to pay between Rs 2 lakh crore (the government estimate) and Rs 8 lakh crore (some private estimates). Such largesse should be accompanied by deeper reforms which ensure that the problem does not recur. For example, when he was finance minister, Yashwant Sinha put Rs 15,000 crore of taxpayer money into the Unit Trust of India (UTI). This was accompanied by substantial reforms: UTI was split up into a good UTI and a bad UTI, the UTI Act was repealed, government fully sold its shares in the good UTI, and the regulator was "persuaded" to end badla trading and permit derivatives trading. These reforms worked: UTI has never created problems again, and the Indian securities markets were transformed. The Surveys of that period were empowered to provide the thinking on such strategy and tactics. The Budget for 2016-17 would do well to outline a strategy that can effectively tackle the current banking crisis.