The new Government should make attempts to restore the credibility of the Budget, says Abheek Barua… The clamour all around seems to be for a “decisive” Government. This, given the last five years of painful dithering and apathy, is a legitimate demand. But decisiveness alone might not do the trick. It is imperative that the new Government is, to use an ugly phrase, decisive about the right decisions… Disillusionment comes easy in the age of Twitter, Facebook and apoplectic news anchors. That said, it is important that we should be fair to the new Government and accept some ground realities…
The first Budget of a new Government, not surprisingly, is perhaps the most critical economic policy document it presents in its entire tenure. It is at least perceived as setting the tone for the administration’s broad macroeconomic strategy over its five-year term, and is expected to reveal some of its “ideological” predilections that might not have been articulated in its election campaign or its election manifesto. The clamour all around seems to be for a “decisive” Government. This, given the last five years of painful dithering and apathy, is a legitimate demand. But decisiveness alone might not do the trick. It is imperative that the new Government is, to use an ugly phrase, decisive about the right decisions.
This becomes particularly critical because the expectation all around – whether of the super-bullish foreign institutional investor (FII), of the harried domestic company crippled by a sclerotic policy environment, or the first-time voter who expects a turnaround in the moribund job market – is that the first Budget of the new Government will be the cliched “game-changer”. Some of these expectations have reached somewhat unrealistic levels – valuations in the stock market at least for some key shares seem to factor in what, in analyst argot, is referred to as the “best-case” scenario. Thus, the Government will have to respond swiftly and credibly to these expectations. Disillusionment comes easy in the age of Twitter, Facebook and apoplectic news anchors. That said, it is important that we should be fair to the new Government and accept some ground realities.
For one thing, if the Budget has to be announced by July, there simply isn’t enough time to entirely rework the interim Budget and produce an alternative set of forecasts.Thus, in terms of the numerical minutiae, the new Budget is likely to look very similar to February’s interim Budget. But here’s where the Government gets to make a choice. It can blindly commit to stick to the budgetary targets that most of us agree involve some pretty tall assumptions and tricks of fiscal arithmetic. The other option is that the Government can be candid about the fact that in a slow-growing economy a reckless fiscal squeeze can turn out to be counterproductive.
This candour can help the Government in many ways. For example, if the Government decides to actually pay subsides that it owes the oil companies and fertiliser producers, it can put an end to the cycle of subsidy deferrals, under-budgeting and further deferrals. It can also put an end to the somewhat mindless fetishisation of numerical targets for some key Budget parameters such as the fiscal deficit and bring the debate closer to the issue that really matters – that is, the quality of fiscal adjustment during a downturn in the business cycle. In short, the new Government could start by restoring the credibility of the Budget.
I personally think that the bogey of the international credit rating agencies scurrying to assign our sovereign ratings quite literally to the junk heap if the Government misses a couple of its Budget targets is grossly exaggerated. After the financial crisis, the whole world has enough reason to question the intellectual bandwidth, integrity and the irrational bias towards Western economies of the international rating agencies. However, I am reasonably convinced that even they understand the consequences of the wrong kind of austerity during an economic slowdown.
Straight talking always helps; if the Government were to present a path of long-term consolidation along with a clear articulation with its short-term constraints, they will listen. So will FIIs. However, buying (legitimate) time for a fiscal clean-up does not imply that the Government should give fiscal consolidation short shrift. If, as the “best-case”-wallahs hope, a new Government comes in with a reasonably strong mandate, it must take the opportunity to take a stand on some of the more difficult and enduring fiscal problems.
There has to be, for instance, a plan for subsidy reduction even if it means a temporary increase in inflation. The Government also needs to present a blueprint in order to rationalise entitlement schemes – it’s still not too late – and finally get rid of a lot of the junk that has piled up in the public sector. Again, there is no need to fetishise any of these things. Privatisation is not an unquestionable virtue in itself. There might be a case for trying to revive some of the loss makers if the Government is confident of doing it. However, there has been enough analysis and assessment that point to the fact that a number of public sector undertakings are beyond redemption in their current avatar. They certainly deserve to be taken off the Government’s books at the earliest opportunity.
Finally, whichever dispensation occupies the offices that flank Raisina Hill must mend fences with industry. The adversarial relationship between Government and industry that has intensified over the last few years has to change. Industry cannot be viewed as a cesspit of venality and any effort to expand, construct and invest cannot automatically be assumed to reek of some concealed malfeasance. In the effort to champion causes like the environment, the incumbent Government seems to have forgotten the fact that we remain a low-income economy with a growing pool of young workers who need jobs. No Government can achieve this without the help of Indian industry. Yes, we certainly need to protect the environment and ensure adequate compensation for the dispossessed. However, we also need to remember that each of these things involves trade-offs and that means some give and some take. Finally, it is imperative for the new Government to understand what India’s status is in the global scheme of things. Clearly, the country has the potential of becoming a superpower at some stage, but there is an arduous road ahead that we need to walk down before we reach that destination.