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That weird time of year is here again when India (or, more accurately, financially literate India) waits with bated breath to see which rabbits the magician in the ministry of finance (or illusion?) will pull out of his torn, tattered and battered hat. What will he do to tax rates? Whom will he hit or hurt? Will he kill the rich (and kill savings and investment as well) à la le crétin Hollande? To whom will he be malign or benign? Which industries and services will he grace with his favour? Which ones will he tax into oblivion? Will his Budget understand that economic entities actually exist for purposes other than paying tax?
What populist sops will he hand out? Which ones will he rein in? Or will his Budget accept that the Indian electorate has raced ahead of its elected representatives who, when they act in the interests of those they represent, do so more by accident than design? Indians now much prefer jobs, opportunities, income and growth to vote-buying sops that barely get to them. Will the FM use this Budget to continue on the path of slashing all price subsidies to eliminate them within five years (as he must)? Will he redeploy funds thus released to enhance more carefully-targeted income subsidies to the poorest, using Aadhaar to minimise leakage (of funds intended for the poor, which flow to the political and bureaucratic class instead) as Surjit Bhalla has so powerfully argued in this newspaper, with compelling evidence.
Will he spend time after the Budget educating the Left (who seem to occupy not another planet, but a different galaxy, where sense is inverted by populist socialist rhetoric into incomprehensible nonsense), and those illiterate in economics, who argue so shrilly that removing price subsidies is “anti-poor and anti-people”? Precisely the opposite is true! Price subsidies indirectly hurt the poor as well as the Indian economy (through deficits that fuel borrowing and inflation). Targeted income subsidies have the opposite effect.
The self-appointed protectors of the poor (who have made it clear in election after election that they don’t want their protection) should understand that instinctively, if they knew how market economies functioned (and accepted that non-market economies don’t function at all) instead of marinating in their confused Utopian longing for illusion. It is mind-bending that the most erudite, interesting, and civilised people in the Indian political space can be so irrevocably committed to such bankrupt ideas/ideologies, proven by experience to be false, and to keep pursuing the unpursuable in the ostensible interests of caring for the poor and the common man, while achieving precisely the opposite with their policies.
In this Budget, will the FM educate his political peers about the direct, strong connection between the current account deficit (CAD), which is out of control (because price subsidies are causing demand for energy to spiral and encouraging egregious waste), and the central fiscal deficit, which now is at the tipping point of going out of control as well? Will he use this Budget to explicate clearly that India must now “export or die” if it is to finance its ever-growing imported energy (and food) needs that will balloon when growth and real income growth are restored to their halcyon 2004-08 trajectories?
Those who argue that India can still finance a CAD and fiscal deficit of 3% indefinitely seem unfamiliar with the Krishnan dictum that “the long-term has caught up with us”. Consider the mess in the eurozone, where it was a tenet of public faith that one could finance budget deficits of 3% indefinitely. The result: the eurozone is over-indebted, in deep crisis, and will take years of reform to pull itself out, while sacrificing a generation in the process. No deficit is sustainable forever. If one runs deficits for too long, one has to aim at running surpluses in the future. Being incontinent for forty years (as India has been) has the same effect as being profligate for ten. We have been both. Will the Budget aim at the ‘impossible dream’ of establishing the foundations for generating future surpluses or will it continue to aim at ‘least-worst sub-optimisation’ that has become the leitmotif of the UPA-led government?
The last few weeks have seen an inexhaustible flow of gratuitous, unsolicited advice to the FM in the media and other fora. Fortunately for us—with his extraordinary intellect and reserves of (uncommon) common sense—he will ignore 99% of it. Thank heaven that for this Budget we have an FM in situ who understands intuitively India’s globalised economy of the 21st century much better than his ‘stuck-in-the-1970s’ predecessor did, and better than most of the Opposition still does. This FM knows what he is doing. He is acutely aware of how dependent and interdependent India is on global cross-border trade, investment and capital flows. He realises, as a consequence, how much harm or good even the slightest inflection of his eyebrows, leave alone his utterances and actions, can do at home and abroad. Any FM who is ignorant in that respect is a clear and present danger to India.
Since he resumed an office he should never have left (typically, those responsible for shifting him will never hold themselves to account for the damage they have done as they should be, because the cost of such malfeasance has been enormous) the FM has pursued an exhausting schedule of single-handedly trying to revive faith in India—i.e. resuscitating the belief of those abroad for whom the India story has soured. More importantly, he has been resurrecting the faith that India has so obviously lost in itself (certainly in its government and political system) with growth imploding from 9% to 5%; resulting also in India’s increasingly fragile social fabric threatening to unravel—not just at the seams but at its heart.
The price India has paid for not having an FM who understood what he needed to between 2009 and 2012 has been a heavy one. Blaming the pathetic global economy for India’s growth implosion is an excuse no one believes. Neither should they, because it is patently false. The wounds India suffered were self-inflicted. The consequences of the damage done in that span, in the cavalier, almost callous, way in which investors (domestic and foreign) were treated, is now palpable as those same investors indicate that reviving the India story won’t work any more. The FM now has to deliver the goods in advance.
Without being micro-prescriptive, one can only hope that, in addition to the minutiae and mind-numbing detail of this twist and that turn in tax or relief for each activity, now so commonplace, the Budget will provide a lodestar and compass for the future—a future on which cross-party political consensus needs urgently to evolve if India is to extricate itself permanently from the mess it finds itself in.
It would also be nice if this was the last year in which an anachronistically silly relic of colonial times—the Railway Budget—is presented. The only thing that it achieves is to permit a minor minister to preen. It should have been binned 50 years ago!
The author is chairman, Oxford International Associates Ltd