P. Chidambaram’s latest budget did what it was supposed to do—convey the government’s seriousness in tackling the core issues affecting the economy. In fact, it did a credible job of reining in the alarming fiscal deficit and in controlling government expenditure growth, despite an election year looming large and a continued commitment to social programmes such as NREGA (National Rural Employment Guarantee Act).
The budget shows promise in terms of reviving growth and investment. But, as with most measures this government has undertaken, there is many a slip between the cup and the lip. Whether it can deliver on its budget commitments—such as limiting the fiscal deficit to 4.8% of gross domestic product (GDP) by March 2014, or notching up an ambitious Rs.55,814 crore in disinvestment proceeds—is a question that will bedevil economists, the markets and business leaders for the rest of the year.
The budget itself has received a mixed response despite being a well-thought-through document delivered under trying circumstances. This varied—and somewhat muted—reaction is understandable given the perception overhang that stems from this government’s poor economic performance from 2009 until August last year when Chidambaram was reappointed as finance minister.
His predecessor reigned over a period of spiralling fuel subsidies, high interest rates, stalled infrastructure projects, a falling rupee, anaemic disinvestment, pending reforms, and plummeting foreign investor confidence in the India story, especially due to the General Anti-Avoidance Rules (GAAR) and its fallout. The list seems endless—the fiscal deficit was around 5% by end-2012, export growth dropped and industrial output sputtered.
Moreover, the perception of corruption linked to the government led to a worrying disincentive to action in terms of moving ahead with policy reforms and approving infrastructure projects.
However, the drift has been arrested, if not reversed, since August 2012 as Chidambaram opened up retail to foreign direct investment (FDI) and allowed greater foreign investment in airlines; pruned fuel subsidies; stepped up comatose disinvestment; and moved to dampen down the GAAR fire. Then he did what he does best: frame a responsible budget.
It’s not all bad
What this budget and Chidambaram’s second stint as the United Progressive Alliance (UPA) finance minister also does is focus the spotlight on the ruling coalition’s overall economic record since 2004 that is more respectable overall than what it’s poor performance over the last three years indicates.
- NREGA: This much-debated programme has added around 5% to the real daily agricultural wage rate and increased rural prosperity—achievements that are nothing to sneeze at. From 2011 to 2012, 37.8 million households were provided employment and 1,208 million days of work were generated. NREGA has also reduced distressed migration from rural areas. However, it lacks in providing skill sets to the rural poor for long-term employability. There are also serious doubts about what long-term assets it is creating for local communities and concerns about the inflationary impact of such social programmes. Clearly, a re-look at NREGA is warranted, despite its achievements.
- Fast economic growth: Helped by the global economic boom prior to the 2008 worldwide crisis and some deft economic management by Chidambaram, India’s economy boomed from 2004 to 2008. This led to the rapid expansion of the middle-class and some 52.4 million being lifted out of poverty between March 2004 and April 2010. In fact, economic growth in the nine years of UPA rule has averaged an impressive 7.9%, despite the current slowdown. Given this strong economic record, it is extremely disappointing that the government has allowed growth to slip to 4.5% today.
- FDI push: The UPA’s tenure has transformed India’s aviation sector, allowing FDI up to 49%. Domestic passenger traffic grew at a compounded average annual rate of about 18% from 2006 to 2011. The period saw the advent of low-cost airlines such IndiGo, SpiceJet and GoAir. The government also took the bold step of allowing 51% FDI in multi-brand retailing, and recommending an increase in the foreign equity cap to 49% in the insurance and pension sectors.
- Right to Information Act: In the justified indignation over high-profile scams, this long-lasting achievement sometimes gets lost. This Act has empowered ordinary citizens to get answers about the workings of the government, its agencies, projects and social sector schemes. This has led to greater accountability of the government at ground level.
Now go all out
Chidambaram’s budget, coming after his reformist moves over the past few months, will go a small way in redeeming the UPA’s mixed economic record.
But it’s going to take much more than the budget to turn the economy around—just like it takes time for an oil tanker to change direction. But with elections in 2014, the UPA is running out of time. It needs to go hell for leather in the next few months on a host of steps such as bringing in the goods and services tax (GST), further cutting fuel subsidies, implementing the New Manufacturing Policy, and sharply accelerating disinvestment.
The government can no longer be diffident if it is serious about reaching its 6.1-6.7% GDP growth target for 2013-2014. It has to pull many levers simultaneously.
The recently formed cabinet committee on investment must show greater alacrity in approving pending projects—in the oil and gas sector alone there are reportedly projects worth $16 billion waiting for approval.
There are many other measures this government can take: invest vigorously in vocational training for the millions of unskilled people about to enter the workforce; expand Aadhaar swiftly to further squeeze subsidies and leakages; and implement some of the Raghuram Rajan panel’s sensible recommendations on financial sector reforms. If it acts swiftly and decisively, this government might put India onto the fast lane of growth again.
Ashish Singh is chairman of Bain and Co., India.