The Hindu Business Line : Soft Budgets and hard choices

When the Finance Minister, Mr P. Chidambaram, presents his most crucial Budget with an eye firmly on the coming general elections, he will try not to displease anybody.

That should not be too hard since people’s expectations are modest: most commentators expect a soft Budget, that is, one of the aam admi, which roughly translates into a little softening of direct taxes, perhaps of some indir ect taxes, and a lot of noise about development and commitment to inclusive growth.

This Budget will be like any other that Mr Chidambaram has dished up since 2004; incremental policy changes wrapped in heart-tugging hype.

Lowered bar of expectation

Most finance ministers operate from their perceptions of people’s expectations of the government’s responsibilities towards the economy. Since 2004, when the economy took off on sustained growth because of past reforms that had begun to take effect, the bar of expectations has been consistently lowered; this year it is set in the floor.

If Mr Chidambaram sticks to his script and promises a lot for the aam admi through resource allocation for the social sector and pampers the middle class by coaxing reluctant banks into reducing interest rates on housing loans and on cars that most urban Indians could do without, he’ll walk away with kudos; if he throws in some fiscal relief for a bewildered equity investor, so much the better.

From the viewpoint of public expectations, this is his least challenging Budget.

From the economy’s viewpoint, however, it ought to be the most challenging. If the Central Statistical Organisation’s scaled-down growth estimate for 2007-08, that “disappointed” Mr Chidambaram proves to be correct, then hope and hype alone may not work in keeping the future even as rosy as it is.

At 8 per cent, growth may be lower than it was in 2006-07 but it is still higher than in previous decades and, of course, higher than anywhere else in the world, barring China.

If Beijing’s attempts at cooling its heated economy succeed, India may become the fastest growing economy in the world.

That may also provide a lot of comfort to the UPA Government; to bow out of office with that kind of record should be very gratifying, not to mention rewarding at the polls.

But the Indian voter trudging to the ballot boxes next year will hardly remember or even think about 8 per cent growth. What he or she will ponder is the high price of food, of the lack of incomes to buy dearer fuel or the TV set his children pine for.

With almost a quarter of Indians living below the poverty line or just above it, what difference will living in the fastest growing economy in the world make to their soured existence?

Promises galore

Of course, that is the whole point of the Budget, one might say; to make the difference with the right policies. The UPA Government’s Budget should ideally take a tally of promises delivered.

Since the vote on account in 2004, and especially after the first full Budget the following year when the declining trend in Budget allocations for social sector growth was reversed, the UPA Government has been committed to the idea of inclusive growth even if it was passed off as a fresh item on the government’s agenda later.

The urban renewal mission was certainly new; had the Centre and States pursued its objectives with even half as much vigour as the States and Commerce Ministry pursue the special economic zone (SEZ) policy, Mr Chidambaram might have had something substantial to report.

Most programmes, in fact, have been shoddily implemented, from literacy to power generation to rural uplift.

Since the effects of such abysmal lapses and neglect are slow to surface, the present government will walk away with the prize anyway; if the Budget is also a sum of successes, say the 9 per center, who will deny it that privilege?

Behind the glitter

But language, like numbers, obfuscates vision and thus blurs the focus of policy. The glare of hype fronting a 9 per cent growth hides the unevenness of that growth and muddies the lessons drawn from it. The current growth has been demand-driven but as RBI data show, it is not consumption but investment demand that is hurtling the economy forward. Gross fixed capital formation has outpaced private final consumption since 2002-03 with consumption growth rates flattening after an initial rise in 2003-04.

Second, the share of public investments in agriculture, the poorer cousin of industry, has been steadily declining since 1999.

The decline was reversed in 2004-05 from 17 per cent the previous year to 20 per cent (with the UPA Government’s first full Budget) but it never rose to the 1999 level of 30 per cent. For all the talk of inclusive growth, there has been no dramatic increase in gross fixed investments in agriculture; public funds have simply replaced declining private investments in the sector.

Narrower prosperity

So what’s missing in policy so far, and the Budget will not be very different, are plans to raise public and private investments in sectors with low incomes and therefore the highest propensity to spend. So far the emphasis on fiscal and monetary policy has worked to adjust consumption patterns.

But interest rate changes can work to a point; the recent reductions, announced by the State Bank of India and some others, for housing and car loans, will not boost the consumption rate as significantly as measures aimed at giving people without purchasing power the means to satisfy their basic needs.

As Sujan Hajra pointed out in these columns last Tuesday, the marginal propensity to consume has declined some 20 per cent over the last decade and half. Per capita income has increased from 4 per cent to 7 per cent over the same period. Prosperity is moving in narrower circles and that’s bad news for social inclusion and the economy. If the rising tide of investments isn’t offset by rising consumption domestically, or globally, given the current trend toward a slowdown, then things could come unstuck. Couple it with rising food and fuel inflation and the economy could start tripping over itself.

Already the worm’s turning. The RBI’s Industrial Outlook Survey based on last October-December data shows a decline in business expectations. Businessmen smell the air better than policymakers who would do well to realise that their cup of soft reforms is now empty.

The age of dismantling archaic controls is almost over; now new institutions and legislations have to be put in place; reforms now involve stakeholders with differing perceptions of what change means to them. The arduous journey towards VAT and GST, and the SEZ mess, show just how tough the policymakers’ job has become.