Column : Dont let the flower wilt

Written by Meghnad Desai | Updated: Jun 30 2009, 03:34am hrs
Budgets are somewhat like fresh flowers. You make a lot of fuss on the day they are out, and, by the day after, they look stale. The mind-numbing details about which tax went up or down and which subsidy was kept are forgotten soon by everyone except tax accountants. In economic terms, few budgets make a difference. Few change the strategic direction of the economy. Most are just make-do affairs; here today, forgotten tomorrow.

So, what can Pranab Mukherjee do to make a difference First, he needs to present a ten to 15-year vision of where Indian economy is going and where he would like to see it go. Thus far, the cautious liberalisation strategy that Manmohan Singh laid down in 1991 has served India well. After the first ten hesitant years, the economy accelerated in the 21st century. Last year apart, India achieved a 8-9% growth rate for seven to eight years. Even the global recession slowed the economy down but not by much. India managed a higher rate of GDP growth despite the slowdown than during any of the first 40 years. The very idea that India considers a growth rate of 5.5% slow is a tribute to the reforms of 1991.

But the world was benign in the 1991-2007 period and India rode on the wave. Now we will have a slower recovery in the OECD countries and boom time may not come until 2012 if then. India has to grow at double-digit rates in a climate which if not hostile, will be at least tepid. India will have to be more stern with itself in raising resources and using them. Foreign investment will come but will need attracting more assiduously. It is domestic savings which will need harnessing. Here the most important thing is for the governmentCentre and the statesto become net savers rather than dis-savers. The budget deficits have gone haywire since 2007. Chidambaram had promised to meet the targets of the fiscal responsibility legislation by 2009 but the recession gave a convenient excuse for overspending; after all, there was an election to be won.

The biggest danger the government now faces is a false reading of the success in May 2009. It is tempting to think that the debt waiver and NREGA won the election and that they tell us that more money should be ploughed into the rural areas. The debt waiver was extremely expensive and we need hard evidence as to who gained and who lost. There is a serious danger of moral hazard in incurring debts and this will hurt lenders and borrowers. NREGA also needs an audit to maximise its good effects.

But if money is to be poured into the rural areas (the National Food Security Programme arouses my deepest anxieties), somewhere there have to be corresponding cuts. Urban subsidies should be cut drastically. The petroleum subsidy should not be resumed and this will save a lot of money. There are many regressive subsidies. This is a good opportunity to overhaul the entire subsidy structure.

There will have to be a lot of disinvestment since not everything in the public sector needs to be there. Why is Air India being rescued The world and India are not short of airlines and the days of false pride in national flag carriers should be gone by now. Air India is one of the least efficient carriers I have travelled with. There are better Indian and foreign private airlines. In case the government gets a hidden subsidy by taking Air India for all its VIP travels, it is time we had more honest cost accounting.

The Budget should lay down basic principles on which public finances will be regularised in the next 20 years. User charges should be universal and exceptions should only be on strictly equity grounds. Sustainability will require taxing consumption in many subtle ways. India has managed better than many Asian economies in relying on its domestic markets and not exports. But here the weight of consumption is too high. Much of it is middle class consumption and it is not a good use of resources. Health and education expenditures will need to be financed by taxing real estate and consumer durables expenditure. But here again, most higher education should be provided on the principle of full cost charging. Free provision in primary and secondary education needs much more resources than at present provided.

India needs to grow at double-digit rates to cure its poverty as fast as possible. To realise this goal, the country needs to save more, especially in its public sector. It needs to redistribute better by charging its growing middle class market prices and then financing its progressive expenditure from a balanced Budget.

The author is a prominent economist and Labour peer