Why the FM must digress

Jul 08 2014, 01:11 IST
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SummaryIn his Budget speech, he should explain how the new government will resolve the tension between good economics and populist politics

By now, the Budget proposals will have been finalised. The finance minister may make some last minute changes, but these will not be substantive. The FM knows that his speech on July 10 will be closely heard and rigorously interpreted. He knows that as the first major economic statement by the government, investors will be looking for an affirmation of Modinomicsthe combination of policies that on the one hand will eschew fiscal populism and on the other push the country back on to the trajectory of growth, jobs and entrepreneurship.

The focus of the Budget speech will, of course, be on the arithmetic of the governments finances. But the FM should digress. He should add a few paragraphs to lay out the markers of the governments economic roadmap. There are four reasons for suggesting such a digression.

One, in the run-up to the Budget, the government has emitted mixed signals. On the one hand, the Prime Minister himself has said that the public should expect tough financial decisions. His minister of state for finance has said that the government has inherited a near-empty coffer. Together, these statements would suggest that the Budget will nix fiscal largesse. It will scale back subsidies, cut wasteful expenditure and offer no new entitlements a la MGNREGA and food security. On the other hand, the government has rolled back rail fare hikes and postponed the hike in gas prices. The presumption is that these were done because of the forthcoming state elections in Maharashtra and Delhi. The net result is confusion. Will the government hold fast to economic logic, as most people had come to expect, or will it repeat the pattern of past governments of talking about good economics but in fact deferring to populist politics? The expectations of the public from this government are high and the disappointment could, therefore, be correspondingly severe. The FM would do well to explain how he will resolve the tension between these two uneasy bedfellows.

In this context, it is worth pointing to the stranglehold of triple-digit oil prices. The march of the jihadi group ISIS across Iraq has caught the world by surprise. To date, this march has not rattled the oil market. The price of oil has hardly moved. This is because supplies have not been disrupted. ISIS is in control of north Iraq, whereas 90% of Iraqs oil reserves are in the south, and not one shipment

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