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BW Businessworld

Further Justification

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The budget this year did not draw plaudits. Finance minister Pranab Mukherjee seems to have noticed the lack of enthusiasm for his marathon effort. He and his satraps were on television without pause on budget day. But that did not make the editors shower praise on them the next day. So, the day after, on Sunday 18 March, the finance minister faced the collective forces of the premier chambers of commerce, and presented a more persuasive version of what he had tried to do in the budget. It was only then that it was realised that he had meant to cheer up business at a time when the entire world is facing harder times.

One of his endeavours that he wanted to be taken seriously was the so-called fiscal consolidation. For seven years, neither his predecessor nor he cared how high the fiscal deficit rose. Now, suddenly, he has become keen on cutting it. But he is not in a hurry. He wants to cut subsidies from 2 per cent to 1¾ per cent in three years. At the rate at which he habitually raises prices, gross domestic product (GDP) at current prices will rise by over 50 per cent. So he will be able to raise expenditure on subsidies by over 35 per cent. Further, the constraint on subsidies is fictitious. It is not as if he has told the subsidisers that they will get no more than the budgeted amount. If they come up with some plausible reason, he will give them more.

The finance minister boasted that he had projected additional resources of Rs 41,440 crore to reduce the fiscal deficit. But all his action is on the revenue side. He has continued his spendthrift habits, but has chosen this time to cover some of his expenditure with taxes. His projection of GDP growth is optimistic. That means revenues are likely to fall short of his projection.

He expects to target subsidies better with the Aadhaar platform. What he means is that for all these years he was giving handouts to the poor without knowing who they were; as long as they were certified — or invented — by gram pradhans and such politicians, they could get on his bandwagon. Now they will ride the Aadhaar bandwagon instead. Actually, there are two bandwagons — the census registrar's and UID chairman Nandan Nilekani's. They have been arguing about who is to bag the poor. They have settled their quarrels for now, but lack of a single identifier will continue to haunt the poor, and the incentive to invent poor will continue to drive local identifiers.

And finally, the three-year targets under the Fiscal Responsibility and Budget Management Act. This act was proposed by former finance minister Yashwant Sinha 11 years ago. It proposed to eliminate revenue deficit and reduce fiscal deficit to 2 per cent of GDP by March 2006, and reduce the ratio of debt-to-GDP to 50 per cent by March 2011. The bill took four years to be passed. Soon after it was passed, the present Congress-led UPA government took over and immediately buried it. The evidence is in this year's figures: revenue deficit is 4.4 per cent, and fiscal deficit is 5.9 per cent. True, despite seven years of profligacy, the government has achieved a debt-to-GDP ratio of 45.7 per cent. But that is because prices have almost doubled in the meanwhile. Only an idiot would hold the government's debt, which pays even less interest than the rate of inflation. The government cannot find such idiots, so it dumps its debt on its own banks. They recoup their losses on it by paying measly interest to their depositors — less than the rate of inflation. And they finance the government by starving private businesses.

The finance minister has a solution for that too: he has made it easier for foreigners to invest in India. But they know little about Indian enterprise. They will invest in Sensex and NSE 100 companies; they will have nothing to do with small and medium business.

Thus the past performance of finance ministers gives good grounds for doubting the credibility of their promises. The finance minister seemed to be aware of this; he assured the industrialists that he was committed to protecting the credibility of the budget figures. That commitment was greeted with the same scepticism as the rest of the promises. If the finance minister wants the country to start trusting his word, he has actually to keep his word. He has been generous with promises. Now, he must show that he is not in business as usual, and that he can deliver on promises. If he does, his budget speech next year will receive a much warmer reception — assuming, of course, that he will be giving it. Meanwhile, we can dream of a credible finance minister with a basic sense of fairness.

(This story was published in Businessworld Issue Dated 02-04-2012)