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Economy

Scoring Low on Politics

Manmohan Singh, current prime minister of India.

Manmohan Singh

Abstract

Politics, not economics, was the main worry for the Government of India on the eve of the latest budget. The budget tried to maintain economic momentum and also address concerns over black money and governance. While it scores reasonably well on the economic front, this paper argues that its political  impact  may be diluted due to lack of signals on a firm action agenda.

The pre-budget annual Economic Survey forecast India’s real GDP (gross domestic product) to grow by around 9.0 per cent in 2011-12. With GDP growth rates of 8.0 per cent and 8.6 per cent in 2009-10  and  2010-11, the forecast  appeared  realistic.  Few would have also disagreed with the Economic Survey’s assessment that the economy had not only recovered from the slowdown caused by the financial crisis, but  that the turnaround was ‘fast and strong’.

Backed by recovery in GDP growth, pick up in savings and investment, recovery in exports, and signs of distinct improvement in government deficit indicators, most felt that the budget could have hardly had better fundamentals. Other than inflation, which has assumed chronic proportions and refuses to be tamed by either monetary or fiscal measures, there were hardly any other macroeconomic anxieties for the Finance Minister and the United Progressive Alliance (UPA) government. The main worry for the UPA government and its managers as they went into  the latest session of the Parliament and prepared for the budget was the shadow  cast  by  allegations  of  corruption  and  the  establishment’s  perceived  inability  to address it.

The last year saw the Indian establishment getting rocked by various scandals. Scandals are not new to India. But the latest disclosures were shocking in terms of their implications on ‘rising’    India’s    main    sources    of    pride    such    as    the    private    corporate    sector, telecommunications and the independent media. Reports flew thick and fast on the nefarious nexus   between   corporate   lobbyists,   industry   and   politics   in   manipulating   business opportunities  such  as  allocation  of  telecom  spectrum.  There  were  also  allegations  over accumulation of unaccounted resources or ‘black money’ by people occupying public offices. For a government about to enter the second phase of its five-year  tenure in office, it was crucial  to  demonstrate  willingness  to  address  these  issues.  A  cosmetic  reshuffling  of ministerial portfolios a few weeks ago had failed to convince people about its sincerity in addressing the concerns.

The Finance Minister in his budget speech mentioned: ‘Certain events in the past few months may have  created an impression of drift in governance and a gap in public accountability. Even as the Government is engaged in addressing specific concerns emanating from some of these events in the larger public interest and in upholding the rule of law, such an impression is  misplaced.  We  have  to  seize  in  these  developments,  the  opportunity to  improve  our regulatory standards and administrative practices. Corruption is a problem that  we have to fight collectively.’

Few expected the budget to be an instrument for the Government to signal a positive intent for addressing corruption. But it has tried to do so by announcing a five-point strategy for unearthing black money. Various bilateral double tax avoidance treaties and tax information exchange agreements have been  concluded. The capacities of the Enforcement Directorate have been strengthened for addressing money laundering complaints. The Finance Ministry is commissioning a study on unaccounted income and wealth. A national policy on handling the trafficking of narcotics is on the anvil. A group of ministers is expected to  study various issues on corruption. And finally, India has been actively engaging various international forums engaged in preventing money laundering and financial integrity.

While the action plan for controlling black money is expected to send out a positive signal on corruption, announcing transfer of cash subsidies to the poor is expected to do the same on delivery of public services.  Subsidies provided through the budget on refined petroleum products [eg. kerosene and liquefied petroleum gas (LPG)] have often been criticised for their inability to reach the targeted beneficiaries. Providing direct cash subsidy to the poor for availing these commodities will serve two purposes. First, only the poor will benefit from the facility as intermediaries will  be  removed. Second, the subsidy bill in the budget will be reduced  leading  to  a  reduction  in  revenue  and  fiscal  deficits  of  the  Government.  The subsidies, however, will probably remain ‘off-budget’ items and would be financed from the Government  exchequer  thereby  continuing  to  remain  financial   commitments   of  the Government. The effectiveness of the system will depend upon accurate  identification of people  below  the  poverty  line.  This  is  not  easy  in  a  huge  country  like  India.  The Government’s long-term plan may be to identify the targeted people for subsidies on the basis of the unique  identity numbers being prepared. The task force set up on cash transfer of subsidies certainly has its task cut out in preparing the modalities of an effective system.

A few other initiatives announced can make differences to the access of the poor to basic needs. These include the announcement to introduce the National Food Security Bill (NFSB) in the Parliament during the  current year, indexing wage rates under the Mahatma Gandhi National Rural Employment Guarantee Act  (MGNREGA) to consumer price indices for agricultural labour, introducing pre-matric scholarships3  for students belonging to scheduled castes and tribes and expanding the scope of the Rashtriya Swasthya Bima Yojana (RSBY) – the state health insurance scheme. Like in the earlier years, the budget retained the emphasis on agricultural credit and rural infrastructure through the Bharat Nirman programme.

From  an  economic  perspective,  the  budget  was  well-placed  to  maintain  the  growth momentum  and  continue  fiscal  consolidation.  Riding  on  the  buoyant  economic  activity encouraging a positive outlook for revenue collections, the budget has projected increase in both tax and non-tax receipts. Better revenue  collections and expenditure management is expected to maintain fiscal consolidation, which has seen revenue deficit declining to 3.4 percent in 2010-11. The budget expects effective revenue deficit4  to decline to 1.8 per cent of GDP in 2011-12. Fiscal deficit is projected to decline to 4.6 per cent of GDP in 2011-12 from 5.1 per cent in 2010-11. While these targets are promising and indicate that the Government is back on the  track of fiscal consolidation, lowering the fiscal deficit will depend upon mobilisation of capital receipts through sale of equity in public sector undertakings. The track record of the Government has not been particularly good in this respect. Unless public sector equities are sold off in a planned manner, revenue receipts may not be adequate, since unlike the last year, receipts from 3G telecom auctions are not going to materialise this year.

How does the budget score on economic and political objectives? On the economic front, there may be  some disappointment over the delay in introducing Goods and Services Tax (GST). There will be cheer though over operationalisation of the Direct Taxes Code (DTC) from  1  April  2012.  The  budget  appears  to  have  performed  reasonably  well  within  the confines of its mandate though many might have expected some innovative measures for tackling supply  shortages and price rises. On the political front, the budget has made an attempt  to  answer  criticism  on  growth  of  black  money  and  corruption.  In  view  of  the impending  state  elections  and  the  discontent  among  people  over  high  prices  and  bad governance,  it  has  tried  to  placate  people  by  avoiding  sensitive  measures  like  cutting subsidies and by extending income tax reliefs. But these may be too  little  to influence outcomes in upcoming elections. The budget’s political impact might be diluted due to lack of signals on a firm action agenda.

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