The Indian Budget 2009-10
Former Finance Minister & Adjunct Professor, South Asian Institute of Management
Barely had the Finance Minster, Pranab Mukherjee, finished presenting his Budget Speech to Parliament when, dramatically after the euphoria of the outstanding Congress electoral victory, the Stock Market tumbled by over 860 points. This suggests that Dalal Street perceives the Budget to be below their expectations, especially where privatization of public enterprises is concerned.
When it comes to privatization there is much too much tongue-in-cheek verbiage over disinvestment to keep the players in the Stock Market hopeful. The Indian Finance Minister says things like “there will be people’s participation in disinvestment”;
“We can’t micro-manage disinvestment in the Budget” and so on—simply pussy-footing with the economic reforms’ agenda. It seems, from his body language, he likes reforms but is constrained to be ‘pragmatic’. He has set the fiscal deficit targets at 5.5% of GDP in 2010 and 4.0% of GDP in 2012. These figures tantamount to saying that there will be as much privatization as the deficit target warrants. Equally, it is tantamount to saying “we reform out of necessity and not choice”. Nevertheless, there will no disinvestment of public sector banks and insurance companies.
Such a capital market psychology is unsurprising also for three other reasons:
(a) let’s underscore that the Indian economy’s GDP fell from an average of 9.0 % during 2005- 2008 to just 6.7% this year. And what is the target for 2009-10 ---just 7.5%: and that, too, dependent on the weather (assumes a 4.0% growth in the agricultural sector); global economic recovery uncertainties and, not least, the bureaucracy’s absorptive/delivery capacity which is quite unremarkable;
(b) the soaring of fiscal deficit from 2.7% of GDP in 2006-07 to 6.2% in 2000-09, which poses a threat to mid-term macro-economic stability as, for example, the price level and foreign exchange rates, and
(c) dependence on huge internal borrowings by government will crowd out credit for the private sector, especially the SMEs where self-employment and most employment opportunities reside. However, SMEs too have their sop --- exemption from paying Advance Tax.
It is worth pointing out here that despite the huge expansionary measures (a net rise in deficit of say 4.5% of GDP) undertaken, to prop up growth to counter the global recession, the GDP only went up 6.7 %. It is not expected that GDP will reach 9.0% until 2014. So expect not transformational, self sustaining private sector- led growth till then. At which time infrastructure investment is targeted to have crossed 9.0 of GDP.
One would have thought that with the drubbing that the Communists got at the General Elections the stronghold of the Left in the UPA was over-- apparently not. Prime Minister Man Mohan Singh’s hope for economic and financial reforms with good governance for 10 plus growth trajectory matched by rigorous administrative reforms seems to be sidetracked by this Budget. Could this ideological spirit have been dampened by the vigorous rise of Maoism in India-- particularly, in West Bengal after 30 years of Communism?
It would appear that there is larger mass of party ideologues that believe that in choosing between equity and growth the Congress should opt for equity by adopting the pro-poor path rather than pro-growth to keep peace and manage internal security. Since such a strategy is not likely to be pro-employment one wonders whether peace and security will be served in the medium term as youth unemployment and underemployment are the root cause of internal security.
Only 12 million jobs are to be created this fiscal year. India’s unemployment rate is around 7.2% of the labour force. Total labour is around 520 million with an increment of around 1.3% annually. This means that each year the Budget will have employment-deficit of nearly 5.0% of the labour force. With the structural change to the economy it will be incumbent for India, like all developing countries, to have massive reforms in the educational sector with emphasis on apprenticeship, vocational and technical skills since the rural mass is either illiterate or have no mechanical skills.
It is high time that India looked at educational reforms from the perspective of national and global labour markets and engaged itself in comprehensive manpower planning in partnership with the private sector and so adjusted the educational curriculum to global, regional and national manpower needs. In this process special treatment may be given to Dalits by empowering them with subsidized apprenticeships as well as vocation, technical, technological and entrepreneurial skills through their own Polity Technical Institutes. This way more than the creamy layer will benefit with equal opportunities for massive upward social mobility based on merit and not simply quotas and political patronage.
Nouriel Roubani expects the US economy in 2010 to enter a new phenomenon of the double V recession. That is to say it’s going to be a W-shaped recession where, as the economy picks up sharply, say, in the last quarter it is expected to drop once more in 2010. Given this global scenario India can not be expected to have an export-led economic growth. So the choice is to depend on internal demand-led growth forces which tend to be sectors such as ICT, Housing and Automobiles. All these manufacturing sectors have not been enamoured by the Budget. Further, there is no change in corporate tax whatsoever. Thankfully, Tax Holidays for exporters have been extended till 2012.
The very good news is that the surcharge on Income Tax of 10% has been abolished. So too the Commodities Transaction Tax. Further Income Tax sops have been offered generally with additional deductions for women and senior citizens. Defence gets a humongous 34% increase which is highly significant as it will impact the neighbours’ defence budgets directly to keep up with the Joneses, so to speak. Rs 500 crores has been earmarked for the Tamil IDPs in Sri Lanka to placate Tamil Nadu while wondering how, and in what form, the government of Sri Lanka will respond to this initiative.
What is remarkable is that there has been a structural shift in the Indian economy where 50.0% of GDP is in services and trade’s share has risen to a whopping 38.0% of GDP. What is unremarkable is that there is no shift in the UPA’s strategy , that while seeking to be pro-poor, it continues to approach development as a welfare proposition with massive subsidies whose social cost-benefit is doubtful as the poor are never empowered with opportunities and choices; and where leakages into the pockets of the politicians, bureaucrats and security agencies are known to be massive through the courtesy of the public enterprises, contractors, cooperatives, labour unions and NGOs.
It is generally well known that most of the Budget’s welfare allocations are spent willy-nilly in a mad rush, lest it lapse, only in the fourth quarter leading to massive misappropriations and fraud. What is also remarkable is the low key content on FDI, which is perplexing for an economy that is doing relatively well as compared to the rest of the world. Subsidies, subsidies and more subsidies symbolizes this Budget. The risks from a possible oil price hike and hike in fertilizer price on further fiscal deficit this year can not be discounted.
Finally, what is most disconcerting about the Budget is that it has no targets with which to monitor and assess outcomes every so often – say 100 days. This is anything but mysterious considering that implementation is so fragile particularly with respect to the PPP infrastructure projects. There are no targets, indeed, even for the centrepiece pro-poor programmes (National Rural Employment Guarantee, Indira Gandhi and Rajiv Awas Yojanas, Rastriya Mahila Kosh, National Food Security Programme etc) that aim at providing safety nets, housing and welfare benefits to Schedule Castes, Slum Dwellers, and Women for example. Many believe that it was these very projects that brought the UPA back to power for a second 5 year term.