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Thanks to policy paralysis at the Centre, we are doing exactly the opposite of what the doctor prescribed, writes M R Venkatesh.
Just days after the Budget 2013-14 was presented on 28th February in the Parliament, the consistent flow of bad news that inundated us prior to its presentation seems to continue. Not surprising considering the fact that the Finance Minister seems to be in a complete denial mode of the challenges facing the Indian economy.
But on this score let me hasten to add that the FM is not guilty all alone. Barring an occasional rant most chambers of commerce, professional institutions and vast sections of the media have been vacuous in their analysis of the Budget. And whenever such analyses are conducted it is restricted to changes in Direct and Indirect Taxes only.
India must be one of the very few countries at the global level that has the maximum pre-Budget hype. Probably the collective national psyche of being constantly being in search of a magic bullet reflects in this hype. Yet paradoxically, our post Budget analysis is rooted to the speech of the Finance Minister and not the Budget documents per se!
For instance, the FM claims to have “set apart Rs 10,000 crore (Rs 100 billion), over and above the normal provision for food subsidy” towards funding proposed the Food Security Act (FSA). Yet a scrutiny of the Budget document reveals that the FM has set only Rs 5,000 crore (Rs 50 billion) on this account.
Is he indicating that the FSA will be a non-starter? Or is there something more sinister?
Likewise the Economic Survey points out that “There has been a surge in projects where implementation has stalled. Both in value and volume terms, stalled projects have been rising since early 2009. As of December 2012, six sectors accounted for about 80 per cent of all stalled projects--electricity, roads, telecommunication services, steel, real estate, and mining.”
The aggregate value of money blocked in these projects, both in public and private sector, is estimated to be Rs 750,000 crore (Rs 7,500 billion). This reflects policy paralysis at the Centre. The nation wanted to know precisely how the FM proposes to kick start these stalled projects. What was expected from him was a promise - nothing more - of a time bound action plan.
The FM knows should he do this, he would instantly revive investor confidence. Yet given the mess that the government is in, he wisely refrained from making any precise commitments. And his answer to this conundrum is the outworn prescription of Cabinet Committee on Investment - a non-starter at best; a deterrent at worst.
This paralysis in turn has a downward impact on new projects too. In a candid confession the Economic Survey points out that “New investment projects have been drying up across sectors, partly as a consequence of rising stalled projects which reduce the ability of firms to start new ones.” Isn’t this a classical example of shooting oneself in his foot?
In direct contrast, classical economics tells us that one has to step up domestic demand, investment and consumption when faced with such external slowdown. Thanks to policy paralysis at the Centre, we are doing exactly the opposite of what the doctor prescribed.
If the diagnosis by the economic survey is spot on, why is the prescription in the Budget gone awry? The answer to this is not far to seek. Any large project now comes with a minimum of thirty percent (Source Naira Radia Tapes and the author’s own computations) cost of meeting the “challenges posed by our administration.”
Consequently, anyone who is not a beneficiary of this loot - from minister to under-secretary - can torpedo any project. That explains why the Budget proposal of referring to CCI inspires no confidence. When even existing investments do not see appropriate closure, one can be reasonably be assured that the worst is yet to come.
Is the worst yet to come?
The Heritage Foundation, an US based Think Tank, tells us that “Thursday was a really bad day for the Indian economy.” The Thursday referred to was 28th February – the day on which the FM presented his Budget.
Castigating the Budget it points out “the central government budget for the next fiscal year leaves India on the same, failing course it’s been on of undisciplined spending and unrealistic expectations” and adds portentously “The true wealth of Indian households has stagnated in the past four years as income growth has slowed and consumer inflation remains high.”
Pointing to the need for to “create tens of millions of jobs in response to demographic expansion” the Budget points out that “This requires manufacturing to lead the economy, and it is not doing so. The reason underlies all of India’s economic problems: lack of reform.”
Going into the numbers the Heritage Foundation puts it finger at the core of the problem: “the budget results for the last fiscal year (i.e. 2012-13) were barely acceptable, with the deficit at 5.2 per cent of GDP. Spending is to increase by 17 percent, yet the deficit is to fall to 4.8 per cent of GDP.”
Well, how did the FM achieve the impossible? Simple he has over-estimated revenues much above the increase in expenditure. No wonder the Heritage Foundation concludes that the Budget “proposal for this year is a triumph of hope over courage.”
Hope? Yes the government believes that even if it is supinely indifferent the Indian economy will somehow contrive to return to its rapid expansion mode of 2004-07, where higher income subsumed inflation. Simultaneously, it ensured revenues for our government so as to fund its wasteful spending programme. Alas 2013-14 is not 2007-08.
Given this paradigm the prognosis of this Think-Tank is “Without a sustained reform process, which will take considerable time, India will not return to the days of fast growth. Government revenue and GDP will continue to disappoint, deficits will continue to be high, and consumers will continue to suffer.”
Heritage Foundation is not alone on this. Several banks, analysts, economists, captains of business houses, corporate honchos, some chambers of commerce and MPs have been voicing this concern - mostly in private and quite a few even in public.
Obviously, the worst is yet to come.
Rupee @ 65?
Forget the future for a moment. Let us take a blast to the past. Why did we slowdown in first place? The economic Survey has an interesting take on this. First, it says that the boost to demand given by monetary and fiscal stimulus following the crisis was large and not yet rolled back. This had a debilitating impact on fiscal deficit.
Second, it states that corporate and infrastructure investment started slowing both as a result of investment bottlenecks as well as the tighter monetary policy. Third it blames the global economy. Remember blaming global economy is mandatory for every government document. [Refer Para 1.5]
If these are indeed the reasons for our slowdown, pray why did Budget not seek to roll back stimulus? What prevented the FM from removing investment bottlenecks? The answer for the same is pretty simple - all these call for taking simple decisions. Let us not forget that the UPA has long forgotten the art of governance.
No wonder the Budget has failed to impress us or inspire confidence even to Indians. But all that has been stated above is internal. There is yet another dimension to all this - the exchange rate of the Rupee and our external deficits.
It is in this connection the FM in his Budget speech concedes “My greater worry is the current account deficit (CAD).” Probably this has been worrying every successive FM since 1947. But the sheer size of CAD now makes it an 800 pound gorilla in his room. Ominously, he adds “This year, and perhaps next year too, we have to find over USD 75 billion to finance the CAD.” [Para 11]
All this when we face an economic slowdown, if not a crisis, at global level!
Assume even if we are keen to beg, borrow of steal [in the words of the FM it is Foreign Intuitional Investment, Foreign Direct Investment and External Commercial Borrowings] the moot question is why should foreign investor or lender play ball with us? What is his compulsion? Crucially, what is the guarantee that the money brought into India will not go down the drain?
Put simply, we have an imperative. Foreigners have choices. But does the FM realise this? Why should anyone invest now in India when it is quite possible that the Indian rupee may suffer another bout of depreciation and possibly touch Rs 65 shortly? What is the evidence that anyone investing into India will not be a victim of a rupee slide by December 2013?
That takes me to the core of the issue - how long are we to remain in denial on all these matters? Unless we save, invest, produce and consume more, we are condemned to be perpetually a developing country. Budget 2013 in fact prevents Indians from saving, investing, producing and consuming more.
Significantly, this Budget does not do anything to break the vicious cycle of despondency that has enveloped the nation.
PS: It is often remarked that Indians never miss an opportunity to miss an opportunity. Budget 2013 only reiterates this.
The author is a Chennai-based Chartered Accountant. He can be contacted at mrv@mrv.net.in