Another shot at optimism

Photo: Shailendra Pandey

IT IS a Budget that the UPA can go to elections with. More funds for welfare schemes, popular outlines for women, super rich tax and promises on controlling deficits. The task for Finance Minister P Chidambaram hasn’t been easy. He has already admitted that leverages outside the Budget will be critical to determine the success of the measures announced. He has dropped several hints for the RBI to take it from where he left the baton, i.e., bring rates down consistently now that the government has put out a classic long-term growth Budget.

In the short term, there are big challenges. The paramount one is India’s current account deficit. It occurs when the total import of goods, services and transfers is greater than the total export of the same. This situation makes a country a net debtor to the rest of the world. The way to fund this deficit is by getting more inflows of foreign funds. But there too, Chief Economic Adviser Raghuram Rajan has admitted, “As you finance from outside, you are dependent on the interest of foreign investors. They have been supporting us so far due to the search for yields. But can we continue to rely on that forbearance?”

That indeed is a pressing question. One option is to boost our exports enough to beat imports, but given that the US and Europe are weak, that’s a hard bargain. On the fiscal deficit, Chidambaram is hoping that funds from FDI and receipts from disinvestment will help. He has promised not to “cross the red lines” he has drawn. Hopefully, we will get more clarity on how fertiliser food and fuel subsidies will be curbed.

On welfare schemes, MGNREGA has been successful in bringing livelihood to the people. One wishes the large-scale plans had come a few years ago when they would had been well-timed and the economy would have had the muscle to heave rural India into our growth story. The Budget paid lip service to the Food Security Bill. Chidambaram enhanced the subsidy by just 5,000 crore over the Rs 85,000 crore revised estimates of 2012.

The super rich tax is a sentiment tactic. That there are only 42,800 people in India who admit to a taxable income of Rs 1 crore itself comes as a shocker. But practically, can we raise serious funds by taxing the super rich for one year, or by adding a tax to yachts, cigars and luxury cars? Our funding needs are far more deep- rooted and colossal, and the new tax may not be instrumental in moving the needle much on the revenue barometer.

One of the biggest determinants of our growth curve in 2005-08 has been infrastructure. This has come to a near standstill because of a breakdown of government and private sector partnerships, and that many projects are stuck in delays has deterred new assets. $1 trillion is what we need to fund infrastructure development. Chidambaram sees India Inc taking up nearly half that investment load. One wonders if that’s going to happen because most CEOs are feeling ‘once bitten, twice shy’ and with growth figures dwindling, India Inc may not be able to revive those flourishing returns we saw at the economy’s peak.

The Budget has gained accolades in bits, but not scored enough. However, Chidambaram came out of it with honours. Considered the doer in the UPA, he has gathered tremendous goodwill since he unleashed reforms towards the end of 2012, tackled subsidies and sorted out diesel pricing. Many industrialists are calling him more accommodative, given that fewer shocks were delivered compared with last year when GAAR and retrospective tax laws threw domestic and foreign investors into a tailspin.

But like all Budgets, this one too depends a lot on future assumptions. The possibility that social schemes will add purchasing power to the people and in turn spur growth is not a linear corollary. The assumption is that development expenditure will be met by higher tax revenue and divestment.

India’s biggest challenges lie outside the Budget. From improving delivery mechanisms to pointed execution of policies, environment issues, procedural bottlenecks that barricade big infrastructure or penning a more inclusive growth story. India needs to develop again and this time it needs to be inclusive. As Chidambaram himself put it, “We can’t invent a big bang.” The realisation has hit home, albeit a little too late.


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