GDP growth has fallen in 2011 to below 7% and 2012 might be marginally better. Inflation, especially of food products, was in double digits for almost two years. Industrial production had become negative for a while but has picked up. Agricultural production is up. The rupee has somewhat recovered from its 19% record decline in the last two months of last year. Foreign fund inflows have improved.
However, investment, especially private corporate investment, has declined. Savings rates are down. Stock market indices showed an upward trend but are inherently volatile. Swayed by foreign fund inflows, they do not at all reflect the state of the economy. The improvement in industrial production is questionable, given recent unreliable government statistics and poor corporate results. The government is not responsible for improving agricultural production. The coming summer season and the monsoon will determine how it will be in 2012.
This Budget has to keep inflation under control, revive growth, savings and private investment, reduce the fiscal deficit, accelerate public investment, prevent large fluctuations in the rupee, make India cost-competitive for exports, control imports and especially the value of oil and gas imports, and improve efficiencies of government. Subsidies and justifiable welfare programmes have ballooned. High inflation for two years is a recent memory and could surface again. Waste and theft of public funds in government schemes is rampant. Infrastructure spending is inadequate, inefficient and wasteful. Volatile foreign funds support the mounting deficits in the balance of payments, leading to severe fluctuations in the external rupee value and in stock markets. Allied to these, is the policy paralysis in government, caused not as claimed by the ?coalition dharma? but by a fractious and overbearing set of ministers. A Congress president on top, heading the National Advisory Council, is an extra-constitutional authority whose wish is law for the government. The NAC and its chief appear to have little understanding about the consequences on government finances and the economy of expenditure schemes that it thrusts on government.
Optimistic businessmen and overseas economists say that India?s problems are due to the global crisis. They say India has turned the corner. Indeed it has not. The global crisis is only another burden on the Indian economy, debilitated by a lack of firm government policies. The European Union?s crisis and uncertainty about the euro will continue through 2012. Our exports will be hurt. However, volatile financial institutional investment inflows will continue.
What must the Budget do? It must reduce social welfare expenditures in the known poor-implementing states. Neither expansion of existing schemes nor any new schemes must be allowed. Social audits of all schemes must help eliminate areas where there is wastage or theft.
Government must move out of managing public enterprises in vital sectors like coal, oil and gas, heavy electrical and other equipment, electricity generation and distribution, pipelines, airlines, etc. This could be through privatisation, leasing to private operators (as with coal mines), replacing ministerial control by independent boards subject to CVC, CAG, etc, and refusing all pleas from public enterprises for government bailouts. Thus, non-tax revenues could increase. Government current expenditures will also come down. The DTC should be introduced quickly, exemptions closed, and excise duty rates brought to levels of pre-2008. Instead of imposing duties on imported Chinese electrical equipment, and proposed on coal mining equipment, government must extend support to these potential industries by cheap loans and tax exemptions.
Tax incentives should extend to all private infrastructure investment and other private investment. Public private partnerships must be the norm for most infrastructure investment.
A new tax on foreign institutional investments not held for at least one year will help reduce volatility in stock markets and the rupee and add to revenues. New incentives for FDI in India must be introduced.
Independent regulators, not government bureaucrats, must determine tariffs of coal, oil and gas. Any import taxes on coal and gas must be removed. Aviation fuel must be a ?declared good? to save on state taxes. An aggressive effort to identify, seize and tax illegal moneys held overseas must be mounted. Similarly, vigorous efforts must be mounted to seize ?black? money and subject it to severe financial and criminal penalties.
Administrative reform must be mentioned in the Budget, to provide for individual accountability of officers. Disinvestment will also help distance bureaucracy from management of public enterprises.
Given the unimaginative and timid record of this government, it is unlikely that many of these suggestions will be accepted. Fumbling attempts to control expenditures and raise revenues, and disinvestment of some public enterprise shares, are likely. Neither control over management will leave the bureaucracy, nor will FII inflows be controlled. Politicians and bureaucrats apart from businessmen are interested in them. There is also the fear that foreign exchange reserves will decline.
This will be a pedestrian Budget, with many pages of numbers, good intentions galore, many little proposals, and no grand vision. It will not stimulate growth or prevent fresh inflation. It is a golden opening for a strong Opposition. That does not exist.
The author is the first chairman of CERC, independent director on R-Infra and R-Power, and an extensive commentator on infrastructure