Column: Budget blues and reds

Written by Meghnad Desai | Updated: Feb 25 2013, 17:31pm hrs
Chidambaram may want to be tough but the clincher will be whether the UPA leadership thinks elections are this year or the next

If you want to know what is fundamentally wrong with the Indian economy, go no farther than the Railway Budget, which each year appears as a curtain raiser to the main event. I almost think it has been devised to make even the most irresponsible finance minister look good. India is unique in having a Railway budget. It is one of the largest industries anywhere in the world in terms of employment. It is also one of the worst-run in terms of accidents, passenger welfare, value for money and technical sophistication. Platforms are crowded and dangerous. You can barely hear the announcements and there is little hope that trains will run according to schedule. Platforms get changed and you can never hear the announcements in time and hence a mad rush follows when the train arrives on the wrong platform. Stairs between the platforms across bridges are most often in need of repairs and the bridges are also narrow and dangerous. Trains are overcrowded; the food is inedible. Rail travel is a health hazard.

The railway ministry has been for years notoriously run as fiefdom by whoever the most difficult ally in the ruling coalition is. The minister then proceeds in budget after budget to send new schemes to his/her state, pads employment for his/her state, adds trains for which the economic fare is never charged and, except by creative accounting as Lalu Yadav resorted to, only adds to the deficit. China has a high-speed train that, even after an initial setback, it has been able to revive and extend. India has the oldest railway system in Asia and perhaps the most technologically backward. There is cross-subsidisation from freight to passenger only because for years ministers have not had the heart to charge proper prices (this year, we are promised better; we shall see). I am told that on the Railway Board even the consumers representatives have been urging higher fares for years now. It never occurs to the politician that people will pay good money for good services; as it is, cheap fares mean cheapening of human lives of railway passengers. But then if accidents happen, ministers need not even be there. Just offer the one or two lakhs in compensation and the job is done.

In the Railway Budget, politics rules, economics is ignored. In the big Budget, there is also always a tussle between politics and the economics. This years Budget is surely the trickiest in this respect. The FM knows what good economics tells him to do. He has to control the deficit and lay down ( yet again) a sustainable path for it to come down over the next few years. Budgets used to be in surplus on the revenue account in the 1950s. It is only the unrestrained spending on non-Plan items that has caused the deficit. Every day, someone thinks up yet another subsidy for the much-loved aam aadmi. What with subsidies for petrol, LPG, water, foodgrains as well as subsidised fertiliser and power on top of constantly rising procurement prices for farmers, one wonders who the aam aadmi is. He is surely not a poor person who has no access to power or clean water or a gas stove or works as a landless labourer. He is someone the politician in his complete comfort inside a laal batti car imagines may vote for him if there was a ruckus in Parliament about a budget move.

Economics tells us there is no such thing as a free lunch. Someone somewhere pays for it. It is the aam aadmi or his poorer cousin who pays for these subsidies in terms of indirect taxes, rotting food and inflation. UPA-2 has been grossly negligent on inflation, and it is very likely that, come election time, it will be punished for this rather than be rewarded for its massive giveaways. RBI has been honestly clear on this. It blames inflation on excess demand and considers the fiscal stance as an important element in the demand push. Unless Chidambaram gives a drastic shakedown to the spending , the deficit will not come down and nor will the interest rates. I do hope that the Budget this year does not disguise certain spending items or leave the countervailing measures ill defined. Last year, the policy of allowing diesel prices to rise was implicit but not laid out explicitly. That sort of trick demeans the status of the Budget.

Chidambaram may want to be tough but the final say will be whether the UPA leadership thinks elections are this year or the next. Watch the Budget carefully and if all we get are promises to cut the deficit but with generous handouts up front then know that the elections are near. Despair then for the economy in terms of growth and inflation if we have a Santa Claus Budget.

The author is a prominent economist and Labour peer