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BW Businessworld

The Headless Horseman

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The economic situation is uncertain just now. The growth rate has come down in recent quarters; growth in manufacturing has virtually ceased. Capital goods lead the industrial decline. That would have indicated a fiscal stimulus — that is, a rise in the fiscal deficit (I would also have suggested a stimulus to investment). On the other hand, both the finance ministers of the Congress's long reign have been incorrigible spendthrifts. They poured money into populist schemes, and tried to reap a harvest of electoral wins without sowing for tomorrow. The result was chronically high inflation and adverse payments deficits. To a finance minister who cared for his country's future, that would have indicated drawing in the reins and reducing the deficit. Perched on the horns of this dilemma, the finance minister decided to be resolutely indecisive. He projected a slight fall in the fiscal deficit's ratio to GDP from 5.9 per cent to 5.1 per cent. And he is being optimistic there. In this past year, his tax revenues rose by 13 per cent. In the coming year, he is projecting them to rise by 20 per cent, which is unlikely. So, he will end up with a fiscal deficit ratio close to what it is this year. In macroeconomic terms, this budget is insignificant.

It carries no great message —no major changes in taxes, no grand programmes of social expenditure. It can be called a carry-on budget. That may be because the finance minister was busy with other things. He is the government's prime trouble-shooter; and troubles follow a trouble-shooter everywhere. He chairs dozens of committees; and behind every committee decision there are hours of patient negotiations. So, he has, perhaps, been busy doing what he is good at, and did not give much time to what he is not so good at, namely making the budget.

In my view, the biggest problem the economy faces today is the slump in manufacturing: industry has virtually stopped growing, and within industry, lead industries, namely engineering and chemicals, are actually declining. Urgent action was needed to help them. It could have taken the form of investment incentives or tax concessions. I do not see why subsidies cannot be used to encourage industries: for instance, essential drugs. While not ideal, subsidies are just negative taxes; they are better than price controls. Instead of taking action that the macroeconomic situation required, the finance minister made lots of little changes in excise duties. Their purpose, apart from raising some revenue, is quite unclear; and they go against the basic principle of taxation, namely simplicity. So I do think the finance minister has missed the bus this time; maybe he had an urgent rendezvous, or a flight to catch.

It has been known for a long time that India's weak point — one that explains a good deal of its inferior performance relative to China — is its underinvestment in infrastructure. Mukherjee spends so much on vote-buying consumption handouts that he has no money to invest in infrastructure. This time he found an answer — get foreigners to invest in infrastructure. To this end, he proposes to reduce withholding tax on interest paid to foreigners from 20 per cent to 5 per cent. First, why 5 per cent? Why not remove this piddling tax altogether? And second, foreigners do not invest in Indian debt as both the capital value and the interest will keep depreciating as the rupee goes down; and the rupee keeps depreciating because the government keeps running fiscal deficits and inflating prices. If the finance minister could resist the temptation to overspend, he would stabilise prices, strengthen the rupee, and make India a trustworthy country.


(This story was published in Businessworld Issue Dated 26-03-2012)