A modest agenda

The budget should aim to create a stable environment for risk taking rather than embarking on ambitious but divisive reforms


By Mohan Sule

Which avatar will Pranab Mukherjee don when he rises to present the budget for the coming fiscal? Will he be the cautious and prudent economist, fretting over the income-expenditure imbalance, or will he be the nifty politician, eager with schemes that will bear fruits in 2014? Manmohan Singh’s appointment as finance minister during the foreign exchange crisis of the early 1990s was widely lauded as it raised the comfort level of lenders and investors. Yet, the same person as prime minister has proved to be ineffective and blamed for the “policy paralysis”. The reasons are obvious. The balance of payment crisis facing the country was so severe that there was no alternative for prime minister P V Narasimha Rao but to let Singh carry on with his work of opening the economy. In contrast, the unexpected defeat of the NDA government and the formation of the UPA government in 2004 were against the backdrop of the India Shining campaign. Its second term began amid buzz of the India Growth story, the country’s resilience during the global turmoil of 2008-09, and its capacity to overtake China in the not-so-distant future if it continued with the same growth rate. Complacency set in and so also the belief that, no matter what, foreign investors have no choice but to come to India. Instead of continuing with the reforms process and setting an example for corporate governance, domestic compulsions overrode economic wisdom. The result? Foreign investors voted with their feet, and the rupee, whose strength at the height of the 2007-2008 bull run had emboldened many professional forecasters to peg the 45 level as its fair value, sunk to below 53 a US dollar, with scary predictions about its future direction.

What does this mean? A professionally qualified finance minister is as good as his circumstances allow him to be. If the job is restricted to balancing the budget, the prime minister can appoint any of the bureaucrats manning the ministry to the post. The person presiding over North Block has necessarily to be a political animal, adept at electoral math. It will not be a big surprise if there is the tightrope walking of balancing subsidies and other non-Plan expenditure with budgeted revenue. At the same time, there is realisation of the limit to instant gratification. The ramifications of the reckless spending by Europe’s PIIGS are still being felt around the globe. The finance minister, therefore, requires sympathy and understanding. He has to be seen responding to the financially weak segments of the economy. At the same time, he understands that creating an atmosphere that encourages investors will be the best help that he can extend. In this situation, the budget maker tries to prioritise, paying attention to areas that need to be addressed on an immediate basis due to the imbalance created by the external environment or their capacity of showing quick returns. The end result is a messy affair, satisfactory to none of the constituents. The coming budget may also disappoint those purists who would want the finance minister to wield the scalpel more forcefully in discarding the fat of subsidies and dole-outs.

The political class sees the budget exercise as one of the means to fulfill some of its promises to the electorate and, during the terminal years of the tenure, to offer blandishments for a repeat from the voters. The investors watch it to gauge the returns that can be expected post the changes in rules. Eventually, for both it boils down to how much risks the budget allows them to take. Reduction in tax rates and scrapping of levies can result in deficit instead of acting a trigger for more productivity. Higher rates of imposts can sap industry rather than provide more revenue. Instead of adding to its popularity, populist schemes can boomerang by triggering inflation or plummeting of confidence in the government. On the other side of the spectrum, the new regime of regulations will be welcomed by investors if it signals a continuation of the past growth policy and not a U-turn for short-term goals. As long as both the constituencies find risk-enabling provisions the budget would seem to have met its objective, notwithstanding tallying the finer details of inflows and outflows. The Direct Taxes Code and the Goods and Services Tax bills, if passed by parliament in the budget session, will create security in the direct and indirect tax structure, which is so essential for risk-taking. The finance minister in essence has not to do much this year except focus on shepherding these legislations instead of trying to ramrod disruptive reforms in banking, insurance and retail. Stability rather than brinkmanship is the need at this juncture.

Mohan Sule