Budget 2009: A story of mismatched expectations
In wake of the global recession that has captured the world's attention over the past few moons; the decisive mandate of the Indian electorate in favor of the Indian National Congress earlier this year was seen as a portent of redemption for the Indian economy. Though a 6% growth is hardly a cause for alarm at a time when the western world is battling shrinking economies, investors had nevertheless pinned their hopes on Pranab Mukherjee's black bag to open and set in motion the process clearing the tailback of delayed reforms the government had been unable to pass in its first term, largely due to reliance on the support of India's communist parties.
In this interview with Professor V.Ranganathan, Professor of Economics & Social Sciences at IIM Bangalore, we analyze the implications of the budget on the nation's economy, question the economic wisdom of the budget's initiatives and try to get into the FM's head to unearth the reasons behind the same.
Fiscal Stimulus and Disinvestment
With the albatross of the Left no longer tied around their neck, why do you think has the government still deterred from a more radical disinvestment policy?
The government has not deterred, it has, rather, dithered on disinvestment. However one needs to put this into current context. The current reality is that markets are down and disinvestment may not bring adequate returns for the government. Also, there is not much of an ideological difference between the Congress and the Communists in some sense. Congress generally tends to follow the middle path on issues like reform or the protecting the social sector. BJP on the other hand, was a little more active on this issue especially under Arun Shourie - though even they do not have much of results to show for and there was much controversy over their policies, subsequently.
What are your comments on the government's current disinvestment policies?
Usually, Congress does not pursue any objective ruthlessly. If they will face pressure from some quarters, they will go slow and not steam roll. Take the Indian Airlines bailout for instance. So I would say that while the government not disinvesting currently is understandable in the economic sense, it may be sending the wrong signals. It should not be bailing out inefficient PSUs. They should rather be given some time, say 3 years, with an ultimatum- perform or perish. Globally, such tactics have worked wonders for public sector enterprises and I see no reason why it should not do so in India as well.
A related issue is that of public private partnership. PPP is a new animal for us. We are not fully equipped in terms of capacity to get the best out of it. This would require a tremendous amount of increase in the governance cap capacity which we currently lack.
On the question of disinvestment in general, I am of the view that even profit making PSUs should be put on the roster for privatization. There is no correlation between profit and efficiency. You may be simply making profits because of a monopoly position. However, the man on the street may not understand this. The government needs to communicate its moves in the correct fashion. The people who get adversely affected by a privatization exercise is not very large. The share of the public sector in the organized workforce is not very large (less than 10%) and organized workforce itself is not very large. But these parties are vocal. Hence, the government should communicate the cost of inefficiency to the masses and set performance benchmarks.
What has happened India so far is privatization by neglect - the governments wait till the financial liability has turned into a political liability i.e. once the public acquires distaste for the organization, and undertake privatization only at such a juncture. The time difference between the two is not much, but the time of action works as an indicator of political will.
Consequences of Fiscal Policy
With India running the danger of losing its investment grade (according to S&P), the widening of central government's deficit to 6.8%, in addition to the red-ink of state governments and various borrowings reported "below-the-line", there are multiple causes for alarm. Under such circumstances, is the government stretching its purse strings a little too far?
Fiscal deficit is not bad per se. It depends on what you spend public money on. NREGA is giving the government bang for buck in terms of publicity for its social sector initiatives. Moreover, this spending does not necessarily have inflationary spill-over effects. Moreover, in Keynesian terms, the inflationary argument is not valid because of the existence of unemployed resources. The government is aware of this and is using the same to its advantage.
Has the government's spending been in the right quarters?
Though we are far from the epicenter of recession, we are suffering from the harmonic effects of global depression resulting in deceleration of growth. A little bit of a push from the government is definitely necessary but it is important where you put the money. If the expenditure ends up increasing the supply of goods and services in the economy then there will be no inflation but if you are simply increasing cash, then there is inflation.
You can't solve many problems by simply throwing money at it. You will have to first improve the governance structure, which is a nuts and bolts sort of an issue.
It has been stated in the Budget that the RBI would mop up half of the Rs 400,000 crore fresh government debt that will be issued. While this would certainly aid in keeping the interest rates down, is it not a setback to the movement towards having an independent monetary policy?
One major contributor to the increase in fiscal deficit has been the Pay Commission, a lot of which was unnecessary. Though I am all for the Singapore Model of paying bureaucrats well, comparable to the private sector, but there is no need to increase pay for the middle and lower bureaucracy. This is especially true since their services are highly substitutable and can be outsourced to the unorganized sector at a much lower cost.
Yes, it is definitely a setback. But we should have seen this coming. A leading indicator was the appointment of D. Subbarao as the RBI governor, who was considered less independent (from the government) than many of his predecessors. However you have to realize that if the government will borrow, then the borrowing will have to be financed from somewhere. In a country like ours, RBI remains the first, and perhaps the only, resort for any such borrowing, at least for the time being. Though this inhibits the independence of monetary policy, there is no other way to finance the government borrowing.
The government has received accolades for keeping the roll-out of the Goods and Services tax (GST) on track. What challenges do you see in further implementation of this new tax regime?
GST is a federal tax. While the government's performance so far is commendable, it will require much more than economic sense and political will to implement the GST completely. Its implementation represents a ceding if control from state to the centre and is more a political than economic move. The states will want to hold on to whatever little tax powers they have, by the skin of their teeth and the centre will need to tackle this issue if nationwide success of the tax is to be made a reality.
Is the UPA government displaying some sort of an ideological confusion by increasing the outlay on the social sectors on one hand and abolishing the surcharge on income tax in the other?
I think the move of reducing taxes has been driven by the general belief in the Laffer's curve i.e. if you reduce the tax rate you can increase compliance and hence increase the tax revenues overall. Also I would say that the removal of surcharges is a step in the right direction. The country's tax structure should be as simple as possible. A complex tax regime only benefits the Chartered Accountants.
A Missed Opportunity?
By staying mum on the front of market oriented reforms, has the UPA government failed to fully capitalize on the clear mandate that it has been given by the electorate or is the UPA government focusing too much on doling out sops which it believes were responsible for electoral victory?
Yes and No. If you ask me, I do not believe that UPA government will be pursuing Thatcherite policies. Tories did not benefit from those and neither did the Labour by taking a right wing stand. We, more than any other country, need to act to reduce the percentage of poor people in the nation.
According to you, what are a few things that are desirable and have been missed by the Finance Minister in this budget?
Having said that, I'm not really sure about whether the government's approach is as direct as the intentions are noble. The way to do it is the use of greater and more number of incentives in the public sector. Professionals should replace bureaucrats. Currently we are imprisoned in a dole-out and bail-out economy mind set. This needs to change.
I do not necessarily agree with the judgment that this budget is a disappointment, which seemed to have been the market's initial reaction. You need to realize that the budget is always scrutinized by only those that are adversely affected by it.
Traditionally, Indian budgets have been the story of disconnect between substance and show, between popularity and intrinsic ability to steer the economy. Contrast Manmohan Singh and Chidambaram: While Chidambaram's budget has often been hailed as the dream budget, it was Singh's budget that led to much more long-standing reforms.
However, if I were to point out some areas of improvement, first is the question of privatization. As I said earlier, there is no need to go for disinvestment now when the markets are down. But signals in this direction could have been given to indicate the government's intentions. Secondly, what is missing in the budget is that it gives no direction. The Centre's role is only so much; states also have to be a part of any government policy. However signals to the states are missing - how should the states go about implementing the policies that involve their participation, their fiscal responsibilities et al. What we perhaps need is a comprehensive 5 year program, outlining the roles of the centre as well as the states.
While judging the budget as a failure or a disappointment is too strong a reaction, given the dynamics of the world economy and state of the markets at the time of the budget introduction, the UPA government has missed the bus in terms of using this as an opportunity to showcase its intentions about reforms and efficiency-driven disinvestment and privatization, without being tied down by nagging voices from its erstwhile coalition partners.
The active partnership of states is quintessential to ensure successful implementation of federal policies such as the GST among others. Moreover, the role of states needs to be chalked out distinctly and their policies aligned with that of the centre.
Though the traditionally week-kneed Congress has shown resolve in pushing ahead many pro-poor reforms, a lot of the work still needs to be done and in that respect, this budget has given positive signals. It is therefore a mixed budget. What will be of important is how the UPA government goes about operationalizing the plans announced in the budget. Only then will we know its true import.
Professor V. Ranganthan is the Reserve Bank of India Chair Professor on Infrastructure in the Economics & Social Sciences area at Indian Institute of Management, Bangalore. An FPM from IIM Ahmedabad, Professor Ranganathan also possesses a Bachelor of Technology degree in Electronics and Telecommunication from IIT Madras. His areas of research include Energy, Environmental Economics, Electricity Reforms, Privatization and Regulation, Infrastructure, Project Finance and Industrial Organization. He has also been involved in numerous live consulting projects. Professor Ranganathan also sits on various infrastructure and academic committees and has won many awards including the Fulbright Scholarship from Kennedy School of Government at Harvard University. Prior to joining IIM Bangalore, Professor Ranganathan worked with NTPC, Lucas TVS and L&T.