It is now two days since the budget documents were presented to Parliament and to the public. During this time, experts have gone over them with a fine tooth-comb, searched for hidden messages, pried out actual and imaginary statements that support or oppose their ideologies and, rated the budget exercise according to their likes and dislikes. What made the whole exercise very interesting is that this time around the Finance Minister was caught between two mutually exclusive choices?boost GDP growth back to 9 per cent per annum even if it means a high fiscal deficit or, maintain fiscal prudence and hope for faster growth next year.
Of course, there were some who maintained that growth and fiscal prudence were not mutually exclusive. It is true that revenues are down because of low growth and more expenditure will mean a greater fiscal deficit. However, the deficit can be brought down by disinvestment in public sector units. The only issue here is that, given the global financial crisis, and the lack of finances in general, who are going to buy these shares?
This is an important issue and needs to be carefully considered. There are two ways the government can disinvest?by selling a small proportion of shares to ensure that control is with the government or, selling more than 51 per cent of the shares so that management could move to private parties. Those supporting disinvestment do so by arguing that when management becomes private, companies become more efficient which essentially increase the return on assets. Hence, selling more than 51 per cent of shares will get a higher price for each share than selling less than that. However, giving up government control of public sector units is a very sensitive political issue and no pragmatic Finance Minister will base his budget calculations on the assumption that privatisation will sail through Parliament. More importantly, even if he were able to pass it through Parliament, with fragile markets he would have obtained a lower price than what he could expect to get in a more buoyant market. So, he has done the next best thing?he has done his deficit estimates without privatisation, or disinvestment. If it happens his deficit will be lower. Now, there can be a political and public debate on it and he has clearly indicated in his speech that he is willing to participate in such a debate.
So, given his two choices, he has decided in favour of growth. I think he made the right choice. I was never convinced about the arguments in favour of lowering deficits as a necessity. These arguments never went beyond citing examples of countries that had low deficit; some, of course, made the exercises sound very sophisticated by running cross-country regressions. Unfortunately for them, the very same countries they would have wanted us to emulate are the ones that are supporting deficits that are higher than that of India. Government profligacy is bad but one has to be able to demonstrate that the increase in deficit is due to such profligacy.
I think this is a good budget for a variety of reasons. First, he has rationalised a tax structure that went a bit awry as the government tried to tackle last year?s inflation that was followed by the crisis. Second, he got rid of the fringe benefit tax and the commodity transaction tax. Third, he has committed to put up the tax code for public viewing in the next 45 days and to introduce it as a bill in the winter session of Parliament. But perhaps the most important thing is that he has publicly stated his, and his government?s willingness to look into some of the more sensitive issues that are yet to be resolved like pricing of petroleum products, reorientation of the fertiliser subsidies, disinvestment, etc. I guess it is now the job of everyone to actively participate in these debates and clearly state what is the economic content, and political angle, of one?s argument. That will make the job of the Finance Minister and the government that much easier.
The next budget will be in February; that is within 8 months. This year the Minister expects the economy to grow at roughly 7 per cent and he has stated that he has taken a gamble by increasing government expenditure and, hence, the fiscal deficit. I will bet with him and praise the budget. It was pleasant to see a budget shorn of hype; a budget speech that was both solemn and thoughtful, given the troubled times the country is going through. I do not know what will happen in next year?s budget should the country grow at 7 per cent this year. Will it go back to being a hyped up speech? I sincerely hope not. I also hope that he will never again use the bee and pollen quote?it is open to too many different interpretations!
?The author is research director, India Development Foundation