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The Finance Budget - a bit early to rank

The presentation of the annual Budget by the Finance Minister, Pranab Mukherjee, seemed lacking in passion and enthusiasm. Contrary to some expectations, it refrained from making bold announcements on radical reforms or a road map, in the delivered speech, on containing the fiscal deficit. The markets were horrified by the fact that government borrowings would exceed Rs 400,000 crores with fears of crowding out private investors and pushing interest rates upwards. The disinvestment programme revealed the raising of a measly Rs 1,200 crores against Rs 25,000 crores as suggested in the Economic Survey. The budget fell short on clarity in addressing the oil subsidy mechanism. The markets construed this as lacking in conviction and almost immediately came under a severe bear hammering.

The fact is, industry, investors and the markets simply read too much into the budgeting exercise which is never intended to be the sole platform for announcing reform measures. Its primary purpose is to present the government’s books of accounts. The process of economic reform, by definition, is continuous with policy announcements and implementation taking place through the year. The budgeting exercise in India’s form of government is primarily to ensure that revenue and expenditure are approved by parliament so that the government can function. Packing too much into this, only leaves it open to political criticism making its very approval an arduous task. Mr Mukherjee is an astute politician, understated, bright, with an amazing eye for detail. Announcements mean nothing if they are not implemented. We have seen ‘dream budgets’ in the past convert into nothing more than an exercise in theatrical expression, with limited follow-up. Mr Mukherjee must be judged not by his 90 minute speech, but by what he undertakes in the months and years ahead. A three year timeframe is the very minimum that he ought to be given to address the economic challenges of the country.

He is undeniably conscious of the fact that the fiscal deficit of 6.8% is only the tip of the iceberg. The actual public dis-saving of the country is closer to 11% of GDP if one were to account for the deficits of state governments, municipal bodies and other expenditure programmes – such as oil and fertiliser subsidies  kept cleverly off the government’s balance sheet. Frankly, the need to pump-prime is inherently in conflict with balancing the books of accounts. Ultimately the only legitimate sources of funding available to the government to meet its ambitious social spending targets are through the proceeds of disinvestment from State Enterprise and therefore this is something the Finance Minister has little choice but to undertake. More importantly, the budget documents did highlight the government’s intent to bring the deficit down to 5.5% in 2010-11 and 4% in the following year. With a bit of luck, the Treasury may be able to adopt the FRBM target of 3% by 2010-13.

The assertive criticism by several analysts and overseas fund managers, on India’s strained fiscal position, whilst justifiable is not the whole story. The total liability of the Government of India is about USD 800 bn – approximately 65% of GDP. This may at a stretch even seem acceptable, especially when compared with several other nations whose national liabilities are much higher than their annual Gross Domestic Product.

Mr Mukherjee has been in politics for several decades. He served as Finance Minister in the Indira Gandhi cabinet when he was in his early forties and brings to the table considerable technical competence and robust political acumen. He has matured far and beyond the needs of seeking unwarranted publicity, is non-confrontational and an unassuming reformer. He understands better then almost anyone in his cabinet the need for fiscal consolidation. But he also recognises the need for economic growth and the necessity to win elections. In some ways the twin objectives are fundamentally in contradiction and the need to balance them far outweighs the luxury of high ratings by the business media, commentators and foreign analysts. Given time and space he will deliver to the nation the mandate entrusted upon him to drive India out of the current slowdown and in the fullness of time, address the need for fiscal semblance.


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