Coming up with a budget is an arduous task in the best of times. This year it was particularly hard. In addition to the usual reforms vs aam aadmi balancing act there was the constraint of an already stretched fiscal situation. To make things tougher, there were the enhanced expectations from impatient reformists given that this was the first year of a term with a clear mandate. The ?if not now, when?? chorus was almost deafening. All this made for the budget this year a great exercise in political economy.
It may help to present, in very broad strokes, the major forces whose interplay decides economic policy-making in today?s India. First, and perhaps the most vocal, are the reformists. The crisis had given them a temporary setback but they seem to have recovered faster than the economy. The immediate gains here go to the rich, the educated and the urban segment but, over time, gains are generally believed to percolate down. Here, squarely, is India Inc. with all its investors and the upper-middle class: a strong media voice.
Then there are the organised incumbents of the labour force. Though over 90% of India?s labour force works in the unorganised sector, organised sector unions, linked closely to the party system, still wield influence. These are the people with an axe to grind against reform, though its indirect fallout may help them in the medium run. Much of the lower-middle class, rightly or wrongly, perceives its interests aligned with this formation.
Finally comes the bottom third of the population?in dire need of government support for mere survival. In size they swamp the immediate beneficiaries of reforms and hugely so if we consider the willingness to vote factor. It can be swayed easily if the government does not present a ?poor-friendly? image.
Given this landscape, a minefield is a better analogy for budget making than tightrope walking. Politically, UPA?s victory is mostly seen as a mandate for policies like NREG, rather than reforms, for the simple reason that whether because of the Left or otherwise, there has been little more than assertion of will to reform in the first UPA term. By all indications, these measures have also been more effective than poverty alleviation measures in the past. Finally with the Maoists spreading across the country it is politically essential to ?take the poor along?. This should, therefore, be clearly the prime thrust areas. Also no one can, morally or politically, question these outlays. It clearly benefits the people who most need support. So that?s a no-brainer.
Government needs foreign investment in the medium and long run, not to speak of the short-run. Energy and Infrastructure need to be strengthened and need all possible support. Further opening up some sectors like insurance and divesting in PSUs may increase flow of funds but will also open up a Pandora?s box with the second group. Labour reforms and petroleum pricing are other thorny issues. Best to duck both these issues for the time being while keeping options open. One battle at a time, and no point signalling moves before you are ready to strike.
India Inc. has certainly not taken kindly to this. For those who watched the Budget and markets simultaneously last Monday, the connection appeared to be very clear. The sell-off came immediately after the phrase ?public sector enterprises such as banks and insurance companies will remain in the public sector?. Markets were betting on a definite disinvestment plan and perhaps an opening up of the insurance industry.
The stock market does not spell votes, but it maybe a good forecaster of future growth. However, nobody knows for sure how many basis points are shaved from the growth rate by these postponements, if not omissions, and politically speaking, even a slightly lower growth performance can easily be blamed on the crisis in these times. Just to lessen the disappointment a bit, the FBT is removed. The revenues would be missed, but at least the executives would not be too mad.
Then there are those inconvenient rules of economics. Fiscal deficit remains an issue. The crisis is still not completely behind us and sector specific sops (take textiles) may avert trouble there, or at least signal sympathy. Medium term inflation and international credit rating agencies are the problems here, but sometimes you just have to take sides.
Throw in a few pre-election sops for Maharashtra and your political budget is ready. That?s not necessarily bad. It has benefits for sections that need it most with no doors shut on reforms. Who knows, it may even give some boost to consumption demand. As they say, ?to be a statesman, you sometimes need to be a politician first?.
The author teaches finance at the Indian School of Business, Hyderabad