A govt that needs growth but doesn?t have the money to fund it cannot invoke principles against those bringing in the cash
As a response to the storm around the economy, finance minister Pranab Mukherjee made a terribly wrong speech in Parliament on Tuesday. As a means to assuage investors domestic and abroad, it was absolutely the wrong handle to steer.
Nobody has claimed in our fiscal history till this government began to proclaim itself that India is a tax haven. No report by any international organisation had even remotely suggested the possibility. Instead, the government was seen as taking a highly progressive step by bringing in the Direct Taxes Code and the Goods and Services Tax.
By pressing the wrong lever, the government managers have however managed to make DTC now sound retrograde and GST is still a long way off. In that milieu, for them to act surprised at the reaction of the markets is being rather na?ve.
What the investors, and that means the aam aadmi too, then want to know is why the government is so consistently barking up the wrong tree. Instead, the minister had a fine opportunity to claim that India has finally entered the adult world of hard budget constraints.
A decade of working out of the Fiscal Responsibility and Budget Management Act has not been as salutary to drill in a sense of responsibility in the politico-administrative class as the current storm has been. All the mandarins in all the blocks of Raisina Hill are sure this year?s budget numbers have to be met. They are petrified of the figures losing their way, which is why the finance ministry has started a weekly review of its cash position to be monitored by the concerned secretary, something that usually happens only in the last quarter of the year.
The Indian government, under whoever stays on as the finance minister, will be willing to trade in a state or two, than allow the fiscal deficit to go terribly out of whack this time.
It would have assuaged the markets more than the tax haven bit, which only a certain Ramdev believes in. The assuaging would have calmed the rupee. A calmer rupee would mean that investors who have a foreign exchange liability will be willing to stay the course in the market for a longer period. That stability would encourage the smaller investors to use the financial sector more liberally and allow RBI the chance to stop selling dollars and pumping in inflation.
Having done that, it would not have been out of place for the minister to have reminded investors that this housekeeping will not lead to a commensurate rise in public investments. The reason they will not rise is because of the straitjacket of expenditure this government has made itself wear.
Fiscal policy works best when it can be used as a counter-cyclical measure. But the UPA government?s expenditure budget has to remain unchanged year after year as it has committed itself to the maximum number of doles that the Indian budget can offer for a long time to come.
There is no space for the government to make any additional expenditure commitment, to provide any financial support for any project for the foreseeable future. When the economy does badly, as in last fiscal and possibly again this year, the government has no fiscal muscle to step in. In a good year, as expenditure by the rest of the economy rises, the government too will be committed to spend massively that will add to inflation.
Consequently, the only driver for the investments has to be from the private sector, domestic or foreign. In that context, the spat over GAAR is then rather immature. A government with zero fiscal room does not fight with the guy who is bringing in the money, over principles. This is why, as the earlier column in FE shows (?Vedanta, Vodafone, Victory? http://goo.gl/Zd7HB), it is terribly unnerving for the investors when the government has a bone to pick with many of them planning projects.
Essentially, what the government needs at this stage to recover ground is to form a business plan based on revival of the conditions for the manufacturing sector to grow. That cannot be a general ambition but must be predicated on a specific plan like the SEZ in the last innings of this government before real estate sharks and the furore over land issues killed its potential.
Since the expansion of railways is doomed and the potential of road projects as a force-multiplier is restricted, it would mean opening the tap for investments in regions like the Delhi Mumbai Industrial Corridor.
To do that, of course, the government has to erase its anathema against zone-based developments. India for quite some time will not have the money, foreign and domestic combined, to create a countrywide development model. Instead, as the surviving SEZs show, creating enabling conditions like infrastructure and labour arbitrage can make these zones very attractive.
Near Near Delhi, the conditions at the SEZ at Noida are instructive in this context. This is the zone that performs best among all the multi-purpose SEZs. A visit to the zone shows why. The cost of land is competitive for small and medium enterprises to set up shop here. Just outside the zone, the costs for them multiply. It is the same bumbling central government that has got its act together to keep the prices low in the zone. Proximity to the densely-populated areas ensures a good supply of labour. Industrial disputes are rare despite successive development commissioners having no real power to settle such disputes. Getting even a couple more of such big time projects off the ground will make a humongous change to the India story.
subhomoy.bhattacharjee@expressindia.com
