Budget must be bold to matter

Budget must be bold to matter

Government must cut deficits to stop crowding out private investment

Budgets are overrated in terms of what they do for the economy. The days before the budget, various worthy personalities in business and academia proffer advice to the finance minister. The day of the budget many people listen with much excitement and there is endless instant analysis. But judge a budget not by its anticipated or immediate impact but 48 hours later. By then almost every budget is forgotten. It is stale khichdi.

Budgets that make a difference have to be bold and against the grain of all advice. Businessmen say much the same thing every year, come rain or shine. They want concessions, they want tax cuts, they want more stimulus. They, of course, also want budget deficit reduced, but not by taxing themselves. There is seldom a coherent analysis of the economy or its needs.

A budget that I remember was proposed by Geoffrey Howe, the UK chancellor of the exchequer in 1981. The economy was in stagflation -- inflation plus unemployment. Everyone was clamouring for stimulus. But the Thatcher government had come into power committed to fighting inflation.

So, Howe proposed a stringent cut in spending and projected it forward in a medium-term strategy. There was outrage. As many as 364 economists wrote to The Times denouncing the budget. But Howe proved right.

It was not a time for Keynesian stimulus but for retrenchment in an overheated economy. The budget not only turned the economy around but also becamememorable.

Pranab Mukherjee has the opportunity this time to make a radical change. In my view there is no need for any extra stimulus, not when the economy is projected to grow at 7%, if not faster. This is not the capacity growth rate but pretty near. If the Indian economy is to grow at double digits, there has to be more room for profitable private investment. Indian interest rates are absurdly high by international standards and government borrowing is crowding out private corporate borrowing.

The debt to GDP ratio at 76% is too high and government consumption expenditure at 10% of GDP is also hard to justify. (It also matches the size of the consolidated deficit.) There has been strong inflationary pressure for the last nine months in the food-grains sector. It is mostly a result of incompetence on part of the minister for agriculture and consumer affairs but the Cabinet has also been shockingly complacent. It may be that the government is testing the tolerance of consumers about inflation while there is no election on the horizon. The government is relying on a strategy of wait and see and letting prices calmdown on their own. It is a cynical ploy.

There is now a chance to make a distinct shift in the direction of fiscal policy. There is not only no need for any more stimuli but the time has come to make some drastic choices. The Kirit Parikh Committee Report needs to be fully implemented.

The oil subsidy is an upper middle class scam (on the excuse of protecting the BPL kerosene users) and a gift to car driving polluters. The permanent removal of petrol subsidy should be a signal that the UPA government will begin to eliminate all the inefficient and (the environmentally and economically) unsustainable subsidies that have distorted the economy for the last several decades. This would include the peculiar guarantee of purchase price to farmers and all input subsidies.

It should accelerate its divestment programme and lay before the nation a roadmap to convert the budget deficit into balance, if not surplus, as used to be the case in the 1950s and to reduce the debt to GDP ratio to a low level such as 25%, if not below, over the next ten years. The economy had come near to eliminating the primary deficit in 2007-08 but the recession gave the chance for the bad habits to return. Now there is no excuse.

The crucial point is that India can begin to stop behaving like an underdeveloped economy. It can get out of the old habits of distorting every market under some excuse of promoting social welfare. All that the various distortions have done is to fatten the middle classes, make food more expensive and then elicit matching subsidies for BPL households. If India is to get into the top league, it should and can begin to behave like a grown up economy. Or even get back to the legacy of Nehru years of surplus on the revenue account of every budget.

If the deficit could be reversed, one could cut the indirect taxes, which are a burden on the poor. If debt could be reduced, interest charges, currently one-third of the revenue receipts, would also go down. If producer subsidies were eliminated, food could be cheaper.
These are the ways to help the aam aadmi. Make the change Mr Mukherjee.

The author is a prominent economist and Labour Peer.

Source: Financial Express

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