The Budget offered hope on some fronts, but it fell short of taking bold reformist steps. In the main, it ignored power sector reforms and allocated little money for subsidies. All can be forgiven if the Budget trims the fiscal deficit and implements cash transfers
Pranab Mukherjee's Budget left many things undone. For example, he could have allowed FDI in multi-brand retail in cities with more than one million people, but chose not to. Labour reforms, critical to boost India’s manufacturing competitiveness, are no longer on the agenda. The current account deficit, at about 3.1% of GDP, is probably the highest since the crisis of 1991, but the FM did nothing done tackle this head-on.
The Budget provisions too little money for subsidies, including the newly announced Food Security Act, which could cost over 1% of GDP. Mukherjee did not hike excise duty to provide for an MGNREGS that is linked to consumer price inflation, nor did he cut corporate tax surcharge when the economy is in the grip of excess demand with high inflation.
The Economic Survey talked of many innovations in delivery systems for social services, but the Budget did nothing concrete in this regard. State electricity boards have losses amounting to a whopping . 76,000 crore. They were restructured when their losses were around . 22,000 crore, but there’s no mention of any reforms here.
Yet, taking a leaf out of Ruskin Bond’s Seven Murders Forgiven, the finance minister may still be forgiven these sins of omission, if he manages to hold the fiscal deficit around 4.6% of GDP after the inevitable tug-of-war over allocations with all ministries and departments. If he can implement the infrastructure debt fund and direct cash transfer of subsidies for kerosene and LPG to at least half the population by the March 2012 deadline, then much can be forgiven.
The nicest thing about the Budget is that it is the harbinger of eternal hope on every possible front, for every sector of the economy. The Budget announced conditional cash transfers (CCT) to replace kerosene and LPG subsidies. This project has been assigned to Nandan Nilekani and might have a good chance of success. The announcement that several legislations, including the insurance reforms Bill and pensions reforms Bill, will be introduced in this session is welcome, though dependent on how bipartisan consensus evolves.
Ahike in the allocation to the infrastructure sector, the possible introduction of the direct taxes code on April 1, 2012 and a promise to introduce GST some time in future, depending on state governments agreeing to the share of the spoils, and most importantly, a promise to keep government borrowing under check in FY12, would go a long way in cleaning up the tax structure without crowding out private investment.
But the Budget presents a bunch of contradictions when one looks at the fine print. Subsidies are supposed to fall from . 1.64 lakh crore to . 1.43 lakh crore when five states are going to polls. The Food Security Act has been promised and the spending on MGNREGS has been linked to inflation. Oil is almost certain to touch $125 per barrel and yet, the oil subsidy is projected to fall from . 38,000 crore to about . 23,000 crore.
Similarly, global fertiliser prices are at an all-time high, and procurement, stocking and disbursement of foodgrains cost around . 1 lakh crore; yet, the other non-Plan expenditure shows a decline.
The power sector is in a complete mess. Power producers have little access to known fuel sources. Environmental extremism in the form of an unimaginative ‘go, no-go policy’ that counts every shrub that grows accidentally on any wasteland as a ‘reserve forest’ has stalled 40,000 MW of private sector power projects. Finally state electricity boards are unwilling to implement the open access policy in the face of looming bankruptcy, something that needs emergency reform. Yet the Budget ignored the power sector completely.
Safe passage of a number of reformist Bills is going to depend on bipartisan consensus, absent for now. When the original amendment to the Insurance Act was enacted, the BJP reached out to the Congress and a happy bipartisan consensus ensued reforms.
So far, the Congress has not reached out to the BJP for the second round of reforms in insurance, even though both parties promised these reforms in their respective manifestos. The key lesson, which seems to escape our political pundits, is that the UPA did not win the 2004 elections because the NDA’s reforms were a failure, nor did it win 2009 because its own populism was a success.
In sum, consider the following scenario: an alarming fiscal deficit, an astronomical current account deficit, unrest in the Middle East and rising oil prices, high inflation, a significant crisis of confidence and FDI numbers falling, and rampant corruption in governance and politics. And you thought I was talking about 2011? No, I was referring to 1991. The parallels are eerily similar, except that we have bountiful forex reserves today to protect us. However, if history is a teacher, then tipping points do occur and it’s best if that is recognised and respected in policy formulation.
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