Going for broke

May 19, 2009. Parliament’s Central Hall. Three days after the Congress-led United Progressive Alliance (UPA) was re-elected at the Centre without much ado, Prime Minister Manmohan Singh got down to addressing the newly-elected Congress Members of Parliament. However, Singh wasn’t exactly in a selfcongratulatory mood. “While the mandate to the UPA has largely come from young voters, it is in the nature of youth to be impatient. They will not tolerate ‘business as usual,’” he warned his party members.

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Singh appeared to be setting the pace when he laid down a 100-day agenda for his Cabinet after being sworn in as Prime Minister. Riding a wave that only a government firmly in the saddle with a clear-cut majority can, many ministers seemed ready to make some brave choices. Kapil Sibal, Union Minister for Human Resources Development, for instance, went out on a limb when he boldly called for the scrapping of Class X board exams and FDI in education.

By the time Finance Minister Pranab Mukherjee was ready to deliver his first Union Budget after 25 years, the tone was set. The stock markets had rallied by 11 per cent between May 16 (the day the UPA won the elections) and July 6 (Budget Day) on the back of the UPA’s sweeping victory and the pro-reform noises that followed. What followed, however, was a bit of an anti-climax. Mukherjee’s 100-minute speech was more like a B-grade Bollywood movie: A frayed, mind-numbing, immensely predictable script, with zero suspense, zero drama and no common strand holding it together from start to finish. The punters on Dalal Street were quick to play the part of box-office spoilers. The benchmark Sensex duly crashed 5.83 per cent by the end of trading on Budget day. Singh, Mukherjee and company, it would seem, had flattered to deceive.

In the Finance Minister’s defence, it must be said that Union Budgets cannot be one-time fixes or platforms for a government to come out with all guns blazing. Yet, it’s an important event because the language and the tenor of the speech indicate in which direction and at what speed the reforms bandwagon is moving. One way to not just pacify the punters, but to also show how serious the government is on moving ahead in key areas like infrastructure, rural development and disinvestment, would have been for the FM to back his speech up with some broad numbers.

As Kamesh Goyal, Country Manager, Allianz, and CEO, Bajaj Allianz Life Insurance, puts it: “(The FM) could have done a few things to show the seriousness of this ritual.” One, he could have identified 10 infrastructure projects with timelines for project clearance before the bidding process, says Goyal. Two, he could have outlined a few steps to monitor the impact of outlays to the rural sector and to reduce leakages; three, he could have named at least five public sector undertakings where disinvestment could have started in four months. And, four, concludes Goyal, Mukherjee could have announced a few concrete steps to reduce the size of government and, thereby, its expenditure.

Instead, Mukherjee chose to devote most of his speech to upping allocations across sectors—rural employment, roads & bridges, water supply, education, and defence. They’re all doubtless noble proposals; however, the only problem with such no-holds-barred largesse is that it sits uncomfortably against a backdrop of a higher budgeted fiscal deficit of 6.8 per cent for fiscal 2010 (against 6 per cent last year and 2.7 per cent the year before). This may not quite be the best time to be tom-tomming record-level expenditure, what with the FM proudly declaring that for the first time the government’s Central Plan has crossed the Rs 10 lakh crore mark. He seemed to be unmindful of the lack of efficiency of the expenditure.

Clearly, India’s finances need to be tackled on a war footing. The UPA’s five years of blockbuster aam admi spend have burned a gaping hole in the fiscal position, which the slowdown-hit tax revenues cannot cover. Last year, the UPA had to borrow to foot the bill for the Sixth Pay Commission award to government servants and to pay for subsidies. This year too, the government will be a net borrower from the markets to the tune of a little over Rs 3 lakh crore, thereby playing a big role in distorting interest rates. This, in turn, may throw a spanner in the stimulus packages being rolled out by the FM. For, as Suman Bery, Director General, National Council of Applied Economic Research (NCAER), points out: “What happens to interest rates will determine the urban consumption demand growth. So far the RBI has toed the line sufficiently. It remains to be seen if it will continue to do so.”

What Mukherjee delivered on July 6, without a concern for the rapidly deteriorating fiscal position, is a repeat of a typical UPA big-spend Budget. This time round, the government is counting on a clutch of assumptions to just keep the deficit at a high 6.8 per cent of GDP. Some Rs 35,000 crore is expected to be raised by auctioning 3G spectrum and arrears of Rs 10,000 crore are expected to be collected from direct taxes. If any of these assumptions don’t pan out, the fiscal situation will only get more precarious. “I don’t mind the 6.8 per cent fiscal deficit, but I would have liked an explanation in the Budget on how it will be financed, how much will be monetised,” says economist Bibek Debroy. To be fair, Mukherjee has been more truthful in revealing the true size of the deficit.

What has come as a big dampener is the UPA’s reluctance to push the envelope—this despite being at the vanguard of five Union Budgets, being freshly re-elected, and having a Prime Minister who himself was FM when India set sail on the reforms voyage 18 years ago. Ajit Ranade, Group Chief Economist, Aditya Birla Group, feels Mukherjee didn’t take advantage of this being the UPA2’s first Budget to lay down a long-term strategy and spell a vision. “It’s a Budget just for six months,” quips Ranade. Adds Ashima Goyal, Professor of Economics, Indira Gandhi Institute of Development Research: “Manmohan Singh’s Budget in 1991 and all of the UPA’s Budgets had a lot of energy. This Budget doesn’t do enough on saying anything about implementation.”

No mention of a disinvestment target is an oddity when compared with the Rs 25,000 crore target mentioned in the Economic Survey. Under the current provisions, none of the disinvestment proceeds is supposed to come into the government coffers. The Finance Ministry intends to ask the Cabinet for a review of this provision. On fuel subsidy, one of the biggest spoilers in the past two years, reform will await an expert committee’s recommendations, as will the new direct and indirect tax code.

Mukherjee has assumed a 7 per cent GDP growth rate for his Budget calculations for 2009-10, which is not very aggressive, given that GDP grew 6.7 per cent in 2008-09—a difficult year by any yardstick. But for his grand bargain to fully play out over the next couple of years, the spur in growth will have to be much steeper. Trouble is, despite his big buck push, few are willing to bet on growth much beyond 7 per cent. “GDP growth depends on factors such as the monsoons and the global economy,” warns Bery.

The Finance Minister has been at pains to point out that “a single Budget cannot solve all our problems”. What’s more, setting disinvestment targets, relaxing FDI caps and de-regulating oil prices could be done outside the Budget in the days ahead. If not anything else, the less-than-expected welcome to the Budget may prompt the Finance Minister to deliver on these reforms in the months ahead. In doing so, he might lower the risk of going broke and improve the prospects of reaping a bounty of revenues in 2010-11. But living within means will still be a lesson left to be imbibed.