he setting: India’s annualised economic growth rate has plummeted to six per cent in the final quarter of 2011, inflation is still stubbornly high, the current account deficit in the balance of payments exceeds 3.5 per cent of GDP, external debt is at a record high, the central government’s fiscal deficit in the current year will exceed the budgeted level by at least Rs 1 lakh crore, the aggregate investment rate in 2011-12 is officially estimated to have dropped by four per cent of GDP since 2007-08, the manufacturing sector has slowed to a crawl, mining output has fallen, the disinvestment programme is in disarray, capital markets are jittery and the international economic environment is weak and very uncertain. Two economists, Eternal Optimist (EO) and a somewhat older Consistent Realist (CR), are discussing what the forthcoming Union Budget might contain.
Eternal Optimist (EO): This is it. This government has made such a mess of our economic policies, it is now bound to reverse course. Do you realise that our growth rate in the last quarter was almost as low as in the quarter after the Lehman bankruptcy in September 2008 at the peak of the global financial crisis? Now that the politicos have failed to deliver, they are bound to turn to the technocrats to save them from further embarrassment. You watch. This will be a historic Budget, which will cut the fiscal deficit, revive economic reforms and reignite investment and economic growth.
Consistent Realist (CR): Really? What do you think the Budget will do to vindicate your optimism? How can the fiscal deficit be reduced when subsidies are burgeoning and new (and poorly designed) entitlement programmes are being rolled out almost every year? Populism is hard to give up, even when it doesn’t work. And what reforms do you think the Budget will announce after so many years of doing very little?
EO: Just wait and see. They are going to allocate less money to the National Rural Employment Guarantee Scheme (NREGS); they won’t push the food security Bill, but will meanwhile raise the issue prices of foodgrain in the public distribution system (PDS); they will announce a credible programme for a phased increase in the prices of diesel, liquefied petroleum gas and kerosene; they will raise the general rate for excise taxes, the Cenvat (central value-added tax) rate, and the rate on services by at least two per cent and move to a negative list; and they will restart the old programme of strategic sales (transferring controlling interest from the government to the private buyer). As for reforms…
CR: Hold on right there! Let’s deal with this fiscal stuff first. It makes no difference what they allocate in the Budget for NREGS; the actual expenditures are determined by what happens in the states. And we know from painful experience that Budget allocations for expenditure have little sanctity in recent years. The food security Bill will wind its own way through Parliament; we can only hope that the standing committee will rectify its obvious design flaws. But I wouldn’t count on the Opposition blocking the Bill in the end. And a government that hasn’t revised the issue price of PDS food for the last eight years isn’t going to start now. As for raising all those petroleum distillate prices to bring them in line with high and rising international oil prices, I wonder what you have been smoking. Look, the government has even re-controlled (in practice) the freed-up petrol price. I will only believe any “credible programme” for petroleum price increases when they actually do them. Till then we are stuck with huge energy subsidies and weakening oil companies. Strategic sales of PSUs? Come off it. The same “coalition compulsions” that blocked them for the last eight years will stymie them now, especially after the setback in the state elections. Now tell me about your reforms.
EO: Well, I believe the Budget will quickly implement the goods and services tax (GST) reform and the direct taxes code. It will announce greatly expanded use of Aadhar to target beneficiaries of government programmes. The speech will herald revival of the stalled initiative to allow foreign direct investment (FDI) in multi-brand retail and increase the FDI limit for insurance. There will be significant reforms in agriculture. I also believe the Budget speech will announce a reduction by the Reserve Bank of India (RBI) of interest rates to revive investment and growth. That will be a novel co-ordination of fiscal and monetary policy.
CR: You really must do better homework. The GST is stuck because of lack of political agreement between the government and the Opposition and Centre versus states. That’s why the relevant constitutional amendment has been languishing for months. I foresee no early breakthrough. As for the DTC, the standing committee has recently reported on it. Perhaps it will be brought for debate in the House after the Budget. Until one sees that version, it will be premature to assess how reformist it is. Remember that the whole exercise was started at a time of buoyant revenues, which is not our current condition. Greater use of Aadhar might well happen but I am less sanguine about an early revival of FDI in multi-brand retail. As for announcing an interest rate cut in the Budget speech (which happened in the 1990s), I doubt that the RBI will agree until it is confident about the credibility of the Budget’s fiscal consolidation effort. Incidentally, I notice you have given up on really important reforms like labour laws. Losing heart, EO?
EO: Come on, CR. How can you believe that the responsible government of a major nation will present a lacklustre, do-nothing Budget when our economy is in such bad shape and going nowhere fast? Even you can’t be that cynical.
CR: Not cynical, my friend. Just someone whose hopes have been dashed by experience too many times. My advice: forecast on the basis of the government’s track record … and be pleasantly surprised if one’s minimalist expectations are exceeded.
Happy Holi from us both!
The author is honorary professor at Icrier and former chief economic adviser to the Government of India.
These views are personal.
