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IN THE breakthrough budget of 1991 that heralded India’s re-entry into the world economy, the finance minister ended his speech by paraphrasing Victor Hugo: a reformed and confident India was an idea whose time had come. This year the present minister, Pranab Mukherjee, managed a waspishly delivered line from Hamlet (“I must be cruel, only to be kind”), but beyond literary flourishes the two budgets had little in common. The first helped unleash a twenty year boom. The second gave the impression that India’s politics have become too dysfunctional to sort out its sputtering economic machine. Investment has slumped and GDP growth slowed to 6.1% in the most recent quarter.
The pugnacious Mr Mukherjee first sought to show that the public finances were being put in order, something investors and an increasingly desperate central bank have demanded. The fiscal deficit of the central government is likely to be 5.9% of GDP for the year ended March 2012 (including the states and off balance sheet items the overall deficit may reach 9%). Next fiscal year, the finance minister said, it would fall to 5.1%. Taxes will be raised and subsidies of fuel and food, which often end up in the wrong hands, controlled, allowing the budget deficit to drop to below 4% in three years’ time.
Mr Mukherjee’s second aim was to address bottlenecks in the economy. So for example, to address a shortage of fuel for power stations, customs duty on imported coal was cut; to help a near-bankrupt airline industry, carriers can now raise more foreign loans; to stimulate infrastructure investment the quota of tax-free bonds issued that can be issued to fund projects has been raised. It was a dazzling display of administrative tap-dancing.
But one that met with no applause by a group of industrialists assembled over curry and ice cream at the headquarters of FICCI, a business lobbying group. Few trust the government to hit its forecasts—it missed them by a country mile last year. And most doubt that bureaucratic improvisation is a substitute for reform. Instead business types were hoping for some big changes, such as the breakup of the state-run coal monopoly, progress on the long delayed introduction of a national tax on goods and services, or a major change in rules towards foreign investment. None of their wishes were granted.
That reflects politics. The government’s authority is at a low ebb after a poor showing in recent state elections. As Mr Mukherjee stood to speak in parliament he was shouted down for several long minutes by the opposition. Even if the ruling Congress Party has the stomach for reform it faces obstruction from smaller parties in its fragile coalition, particularly the West Bengal based Trinamool Congress. In response to a sensible proposal to raise rail fares this week, its populist leader Mamata Banerjee demanded that the railway minister (who belongs to her party) be fired. Imagine what her reaction to a large privatisation programme might be.
One view is that none of this really matters: India’s economy thrives in spite of its politics. The government says growth will recover to 7.6% next year, below the heady rate of over 9% the country once enjoyed, but still decent enough. The stock market has soared this year, after a dismal 2011. Yet an economic bounce needs a pick up in business investment, and India Inc is in a mighty sulk. The budget will not change that. Rajiv Kumar, the head of FICCI, the business lobby, says his biggest fear is “the assumption that we’ve bottomed out”. He complains about “the lack of any attempt to take bold steps to bring reforms back on the agenda,” and says his membership remains wary. A recent government initiative to cut through the red-tape that blocks many projects has not worked so far; “people have seen through that”.
Meanwhile the central bank is terrified that inflation will begin to pick up again if growth does, reflecting the host of supply-side constraints from agricultural supply chains to a lack of infrastructure that are catching up with India. As a result it is wary about cutting interest rates. And there are painful noises from the banking system, which over the last three months has needed repeated liquidity injections from the central bank. The Reserve Bank of India and Mumbai’s financial types insist that this is a technical matter, rather that a symptom of financial stress in an economy that has slowed down sharply. Let’s hope they are right.
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