March 3, 2013


[However, how long can 'vote banking' Budgets deliver growth, employment and macroeconomic stability? The Indian experience says " not very long" since GDP came tumbling down to less than 5% in 2012 from a high 9.3 in 2009-10; the rupee crashed from round Rs 45 per $ in July 2011 to Rs 55 per $ in December 2012, the fiscal and revenue account deficits sky rocked to historic heights to cause massive inflation, especially in food, and thus punish the very people populism was to benefit! Here is an example of the paradox virtue with populist budgeting! They were at an optimal level of 2.5 and 1.1 % of GDP respectively in 2007-08 but swelled to 5.1 and 3.5% of GDP in 2011-12.]

By Madhukar SJB Rana*

Finance Minister Chidambaram, fresh from his novel stint as Home Minister, presented his 8th Budget; equal to that presented by Moraji Desai, who later on, after deserting the NC, went on to being the Prime Minister of India from 1977-1979 ( It was PM Desai who gifted Nepal two treaties of trade and transit for the first time in 1978 - with innumerable trade concessions surpassed only in 2002).

This fact must have weighed, to an extent, in P.Chidambaram's conscience while preparing the Budget: along with the possibility that, if Rahul Gandhi develops cold feet to lead the NC for the next general elections in 2014, it is he who is most likely to be the NC candidate for PM - mainly because Rahul Gandhi has no proven experience, whatsoever, to match Narendra Modi as PM  as the BJP's candidate.

And, of course, there is the Chidambaram with his international reputation for being a reformer; which reputation he has to safeguard if he is to have a voice in the corridors of economic diplomacy as India sorely needs FDI and FII, from the global financial markets, which have frittered away since 2011.

Overall, the Finance Minister has done a fine balancing act, given that general elections may take any time before 2014, between populism and fiscal splurge that the Gandhi dynasty subscribes to; and the need for restraint and austerity for growth and macro economic stability. He must not be surprised that barely after he finished his Budget Speech the stock and bond markets were going negative; the Indian rupee further depreciated, and the Indian bonds are likely to be rated, by global finance, as near-junk!

Against all odds no doubt, Chidambaram had a difficult role to play over burdened by the populist legacy of Sonia Gandhi-Pronab Mukerjee combine that, incidentally, paid huge dividends to bring the UPA back to power in 2008.

However, how long can 'vote banking' Budgets deliver growth, employment and macroeconomic stability? The Indian experience says " not very long" since GDP came tumbling down to less than 5% in 2012 from a high 9.3 in 2009-10; the rupee crashed from round Rs 45 per $ in July 2011 to Rs 55 per $ in December 2012, the fiscal and revenue account deficits sky rocked to historic heights to cause massive inflation, especially in food, and thus punish the very people populism was to benefit! Here is an example of the paradox virtue with populist budgeting! They were at an optimal level of 2.5 and 1.1 % of GDP respectively in 2007-08 but swelled to 5.1 and 3.5% of GDP in 2011-12.

Finance Minister Chidambaram, the architect of the well meaning Financial Responsibility and Budget Management Act 2003, must have shuddered inside, as he invoked these very instruments while delivering his Speech, which his predecessor chose to ignore - yet was rewarded with the Presidency!

It used to be said that the driver of growth in India is not the external sector but domestic consumption by households and private sector investments. With much pride, Indian economists alluded to the fact that India was immune from external shocks as compared to, say for example: China.

How is it then that as, given the recession in Europe and Japan and feeble recovery in the US, China musters up more than 8 % GDP growth whereas India is struggling for 5%? The short answer is this: mismanagement.

The logical question to ask, therefore, is this: will the Finance Minister be able to arrest mismanagement? Here one has severe doubts. Why? PM Man Mohan Singh is a spent force as an economic reformer who certainly is no Narasimha Rao as PM, who could lead from the front and suffered in the bargain.

The Finance Minister is no Minister of the Economy with clout to direct his colleagues - many of whom are senior to him and not even from the same party. Being promoted as Deputy Prime Minister in Charge of Economic Affairs would certainly have helped; but this is going not to be. So we are left with each Minister doing his bit over his or her ministry with no accountability for economic performance or lack of. Yes, there is provision for the Outcome Budget but this is  a fiscal instrument of accountability to Parliament and not the Finance Minister nor the Prime Minister.

One is left wondering how on earth will those opening words of wisdom on the philosophy of budgeting, its policies and priorities will be converted from rhetoric into action through good management. Simply announcing a Coordination Committee to do the job of implementation and execution will not suffice given the bureaucratic labyrinth and its ineffectiveness in matters of horizontal - as compared to vertical - communication, control, command and coordination.

Good governance is the need of the hour as massive graft, corruption and collusion have paralysed decision taking. Public institutions have been so weakened by the rampant encroachment of politics into administrative autonomy that administrative reforms is as much a necessity as is economic, financial and legal reforms.
Far too much emphasis has been given to policies and plans with far too little on institution building, their empowerment and modernisation. No where does good governance and administrative reforms find place in the Finance Minister's Budget Speech!

As for food inflation which has been the bete noire for the UPA government,  the Finance Minister has a staggering 11% food inflation to contend with! Yet, why no mentioning at all the reforms that are needed on the supply side vis procurement, storage and transportation mismanagement and monopolies? The criminal rotting of food grains in the Punjab and elsewhere in the sad presence of  massive hunger in the poor drought-prone, poorly irrigated districts strikes s severe blow to a sought image of Incredible India.

It is no wonder, particularly amidst the private sector, that they question how with the existing political divide and coalition politics is the government to grow the GDP from 5% to 6.1% in 2014 - never mind 6.5 % as also hoped for? Many believe it is paralyzed with indiscipline and indecisiveness. One wonders, with the continuing unfavourable external environment, and the spectre of an early general election forced upon it by the likes of the Gandhian Anna Hazare if GDP will grow beyond 5,5% next year?

The Finance Minister is to increase expenditure to 16.7 lakh crores, (1 crore = 10 millions) which is a whopping 27.8% rise from 2012-13. And yet he proposes that he will manage to control the fiscal deficit to 4.8% of GDP from 5.3% in 2012-13 ? We are not told how: just to hope found on an assumption that the GDP will grow to 6.1- 6.5%:  and thus contribute the necessary rise in total revenue to meet his expenditure plans. What contingency plan has he in the event the growth assumption is not borne put? There is none. Surely, hope can not be a method for sound Budgeting. Mercifully, the weather Gods are expected to behave normally in 2014. But if geopolitical tensions mount in West Asia economic disaster could befall us all in South Asia so heavily dependent on the remittances economy. The World Bank estimates that a $ 50 rise in a barrel of oil will lead to regional fiscal and current account deficits rising to 1.5 and 0.8% of GDP respectively, and regional GDP decline by 1.6% !

Yes, he plans to divest but unfortunately allowing state enterprise's  shares to be owned by the people but not disinvesting these shares to raise monies to support the revenue needs -- in short, to privatise state enterprises to levels beyond the magical 49% equity only. For example, why can't Rs 26 517 crores not be raised from the private sector to meet the Capital adequacy needs of the 13 state owned banks to meet the Basel  Ii criteria rather than allocate that amount from tax payers contributions? Why could this tax revenue not be diverted towards funding the debt repayment which consumes a humongous  20% of the Total Revenue?

Such a political move would have dynamic impact on the investment climate and also reduce the interest rate for manufacturing industries.

"The purpose of the Budget--and the job of a Finance Minister--- is to create economic space and find the resources to meet sociology-economic objectives" , said Chidambaram. Is it really that? One would have thought political objectives also are legitimate objectives. And precisely the mix between political- social-economic objectives makes for a balanced or populist budget.

This is by all accounts an Inclusive Budget.  A budget that espouses more the wisdom of Nobel Laureat Amartya Sen than those traditionally ingrained in the Washington Consensus, as embodied in the IMF and World Bank's economic policy prescriptions and strategies which near totally ignored human and social capital in favour of financial and physical capital by underscoring financial and economic liberalization, which has led to historic income inequalities between thereof class.  Rich and the middle class.

Thus on the economic side, this Budget seeks inclusion through connectivity by creating industrial corridors from Delhi to Mumbai; Mumbai to Banglaore and Chennai to Banalore. it is expected that Japan will be a big investor in these projects. Similarly, the ADB will fund the North East India-Myanmar corridor which will connect, in due course, Bangladesh, Bhutan and Nepal eventually to fructify Nepal's 1996 vision for the creation of the South Asian Growth Quadrangle. All these developments will no doubt create a spurt equally to the BIMSTEC cooperation initiative in the Bay of Bengal region.

Populism is clearly manifest in its tax proposals to soak the rich, as it were. No tears will be shared by the masses if the near- 43000 super rich have to pay a surcharge of 10% on their income tax.

What, however, is surprising is this: how can India be complacent with just around 11 % of Revenue: GDP ratio? This suggests that very few are actually in the tax net. Would not measures to widen the tax net and mopping up the black money have not have been enunciated in the Revenue Plan? Especially, when people like Sri Baba Ram Dev have created a social movement for the inclusion of black money in the formal economy. Why is there no target for revenue mobilisation to say 15% of GDP when even poorer countries like Nepal garner around 13% of GDP and believe that it could be as high as 20% with radical reforms in Revenue Administration and more assertive application of the rule of law through eradication of corruption.

From a political economy perspective the Budget is a mater stroke as it focusses massively on agriculture and rural development as well as the people below the poverty line together with targeted focus on women, tribals, Dalits, OBCs, Muslims and not least youth.

From Nepal's national interest, the emphasis on watershed management and river connectivity is most welcome. It does not take much to appreciate how strategic Nepal is in India's eyes over food, water, employment and climate security with its vast water and hydro resources that, if exploited for mutual benefit, can take the two economies to a path of sustainable development and prosperity through mutual sharing. Having said the above, it would be against Nepal's national interest if our short sighted political leadership will exploit the grand opportunities created by this Budget for smuggling of gold, silver, mobiles, luxury goods, cigarettes etc. this temptation must lurk high in all political parties who will have to fight general and local elections in the wake of the massive unpopularity after their failure to give the people their promised Constitution and mafia-free governance.

Youth empowerment and leadership is at the forefront of the Chidambaram Budget 2013-14. Why not allow them to massively come into politics on their own standing as Independent candidates? Such an entry will enhance pragmatism and situational thinking far removed from the vestiges of outworn 19th century political ideologies.

A model that was propounded by Nepal's former Finance Minister Dr PC Lohani in 2003 is to have the State pay for each vote garnered beyond the forfeit threshold of say Rs 25 per vote. What a change this will bring to the leadership panorama in South Asia as a whole where creativity, innovation, energy and competition will rule the political landscape rather than be left perennially in a vortex of senility and mediocrity as now. Not only will money power and muscle power be over but so will it unleash positively the Revolution 2020 as perceived by Chetan Bhagat.

In conclusion, while emphasizng so much on youth and human and intellectual capital development the Finance Minister has no Outcome targets for Employment and Self Employment, which is a hugely disappointing.

For Inclusive Growth and Development it is high time that we moved away from conceptualising Labour as a Derived Demand by opting for Integrated Manpower and Educational Planning with such a planning framework being an integral part of national and state level planning. It goes without saying that this should be equally be a priority approach to new planning by FICCI, CII and all Chambers and Professional Association who should work in partnership with the governments at all levels in a true spirit of Public Private Partnerships for Youth Leadership Development and Empowerment.

As a footnote let me add that the Chindabaram Budget 2013-14 will leave no choice but for the BJP to have Narendra Modi elected as their candidature for the Premiership of India in the battle Royal between the Congress and BJP and their allies. He has the answer to the electoral imaginations underlying this Inclsuive Budget. Modi can ignite the  missing link, which is the national private sector and the international financial markets. No more are the rich Industrial Countries interested purely in poverty eradication of others but the malaise in the own economies which only rising Asia, Africa and South America can salvage for them.

Professor, South Asian Institute of Management, Former Finance Minister of Nepal.