PC's budget options: Responsible, populist or growth-oriented?

The most-hyped and highly anticipated economic event of the country, the Union Budget, will soon be unveiled by the finance minister.

‘Responsible budget,’ ‘growth-oriented budget’ and   ‘populist budget’ – have been the demands from different constituents and various stakeholders. Can finance minister P Chidambaram reconcile these terms and present a please-all budget? And will this budget also deliver for the aam aadmi and young India?

‘Responsible budget’ has been promised by him to international stakeholders during his recent world tour. He has assured them that Indian government will present a budget that will meet the high expectations of rating agencies, foreign mutual fund investors, India-related debt funds as well as private equity and hedge fund players. Their support is critical at this critical juncture. Both government and Indian industry require incessant flow of foreign money to bridge the current account deficit and boost investment.

Economists and analysts have made an educated guess on what Chidambaram intended by ‘responsible budget.’ He must have meant that fiscal deficit for this year will be contained within the promised figure of 5.3 per cent and in the next year it will be within 4.8 per cent. He will likely slash subsidies to 2 per cent of the GDP and would have provided a precursor on reforms that would set the motion for a 9 per cent economic growth and keep the India growth story intact.

The finance minister is a master at accounting skullduggery. He will push some subsidy payments to the following year, move various items below the line and will quite easily make the economic indicators coming out of budget look healthy. He will announce reforms that will mightily please these stakeholders while deferring questions on implementation to respective ministries. This constituent is a cakewalk for him to please.

‘Growth budget’ is what Indian industry desires. Again, it is easy to herald a guess on what captains of Indian industry would like the finance minister to do. Keep subsidies and fiscal deficit within given parameters so as not to warrant a de-rating of the country. To please Reserve Bank of India, industry wishes a reduction in overall expenditure. The Central Bank would then oblige them by cutting interest rates in their next meeting that would reduce cost of capital and improve profitability. They would also like to see no new taxes imposed and a time frame for implementation of the most important tax reform – introduction of Goods and Services Tax (GST).

And there are specific demands from various sectors – the automobile industry craves for a reduction in customs and excise duty, real estate sector likes the government to render it infrastructure status, the gold merchants would want no hike on import duty on yellow metal, exporters would want some sops, stock market participants yearn for the abolition of security transaction tax while commodity traders do not want the tax imposed on them.

Undue worries

Chidambaram has no undue worries about leaders of Indian industry. It is an open secret that they will sing paeans and lullabies in public even if he presents a mediocre budget and hence are easy to please.

‘Populist budget’ is what most of political class wants. Their requirements in an election year have never changed since independence. Announce freebies and schemes that can have an impact on as many  voters as possible. Hence they would want a loan waiver scheme to please farmers. An income tax deduction up to Rs 5 lakh and new tax free savings scheme to woo the middle class. A Food Security Bill that can provide rice and wheat at Rs 2 kg to all of poor. They also want to soak the rich by imposing a surcharge on incomes to blunt criticism of the fact that our country has experienced high economic growth but no job creation over the past eight years.

The finance minister would do his utmost to please this constituency. His ambition of becoming a future candidate for prime minister rests in their hands and he will do everything required in his powers to deliver on their demands and keep them happy.
Unfortunately what Indian economy currently requires are cold hearted measures and not soft touches. For a sizable reduction in corruption, ministries need to be purged and leakages in schemes stopped. To tackle inflation, infrastructure and supply chain in agriculture products need improvements. To fulfill skill requirements of Young India, good schools and hospitals must be built. To boost income of farmers and landless labourers, major reforms are required in the agriculture sector. Job creation for semi-skilled and unskilled involves making India a preferred destination for manufacturers.

For this year’s budget to be consequential, the finance minister must purge the bloated bureaucracy, get rid of unwanted ministries, reform the country side, remove impediments for agricultural growth, abolish price controls, make India an much an easier place to start as well as to do business, move away from social welfare to social development and scrap the 147 centrally sponsored schemes and replace them with a cash transfer scheme. In short, India requires a ‘reform budget’ to radically transform itself and to fulfill the dreams of becoming an economic superpower.  It cannot wait for another 15 months or a different government to deliver.