Budget: A victory for pragmatism and realism

The minister learns from Europe's economic suicide, and pulls off a difficult balancing act, says Claude Smadja.

Let us be realistic: looking at it from the perspective of a foreign observer not involved in the usual sparring of domestic politics, the Budget presented by Finance Minister P Chidambaram is very close to the maximum that could be expected in a difficult domestic and international context.

One can, of course, bemoan the absence of any new and significant reform.

However, this would be erring more on the side of wishful thinking than on the sober assessment of the very narrow margin of manoeuvre for the United Progressive Alliance government in the presentation of one of its last Budgets before national elections.

In fact, Mr Chidambaram had to perform a complex balancing act. On the one hand, sending a strong signal that he is committed to the top priority of reining current account and fiscal deficits - with the aim of bringing the latter down from 5.2 per cent to 4.8 per cent of the gross domestic product (GDP) for 2013-14.

India is not in a position to ignore or underestimate the risk of a downgrade.

On the other hand, he has to make sure that the cuts in government spending and increases in tax revenues presented in the Budget do not make it even harder to push growth from five per cent for the ending financial year - its lowest level for the last 10 years - to a relatively ambitious target of around 6.5 per cent for 2013-14, India also not being in a position to ignore the social and political risks of another year of economic stagnation.

In that respect, again from a foreign observer’s perspective, it is reassuring that Mr Chidambaram drew some lessons from the disastrous experience, verging on economic suicide, that Europe is experiencing.

His Budget is constructed to increase government expenditures and investment - especially in key areas such as infrastructure, education and health care - while increasing some tax revenues in a way that should normally be calibrated enough to avoid choking off investment and economic recovery.

As part of this balancing act come a number of measures to promote home ownership that should help support domestic consumption, to provide incentives for a revival of investment in the manufacturing sector which was completely stalled over the last year, and to attract more foreign investment in India’s financial markets by simplifying and streamlining some maddeningly arcane procedures foreign investors have had to go through until now.

What was especially heartening in Mr Chidambaram’s presentation was the blunt admission that “to be frank, foreign investment is an imperative”.

As a pragmatic, no-nonsense, political leader knowing fully well what kind of issues and obstacles are preventing foreign investors from a greater involvement in India, the minister realises that this kind of statement has to be forcefully illustrated and followed up by government actions.

It still remains to be seen, for example, how his reassuring signal on the Vodafone tax case will be translated into a solution to an issue that has rattled the international business community.

Beyond the Budget, these are the steps without which investors will continue to feel insecure - whatever the Budget’s

merits.

In the same way, the minister must certainly realise that he is facing - and will continue to face - a tough credibility test when it comes to the steps that need to be implemented to get down to the targeted deficit of 4.8 per cent of GDP.

In that respect, there are some quite risky assumptions in the Budget that will be tough to have materialise. For instance, Rs 55,800 crore of revenue is supposed to come from divestment in state companies, when the government was not able to achieve less than half this target for the ending financial year.

Similarly, one has to wonder how the ministry of finance expects to more than double revenues from fees in the telecom sector, when the forthcoming auction of mobile airwaves has started on quite a bad footing and the whole sector remains in trouble.

Last but not the least, (almost) everybody will applaud to the stated goal of reducing the total amount of subsidies to two per cent of GDP - to be later brought down to one per cent. And there is no doubt that Mr Chidambaram has his heart in it.

However, everybody realises the unrelenting pressures on government spending that will keep building up as we get closer to general elections. So, for all of the finance minister’s commitment, one can be forgiven for asking whether his pledge will not end up joining the endless list of broken official promises when it come to tackling subsidies.

This being said, there is something of a “trust factor” playing in favour of Mr Chidambaram from the part of the business community. Some good reform steps taken since last September, such as the opening up of the retail sector to global supermarket chains and other measures to incentivise foreign direct investment, have contributed since the end of the last year to what may be the beginning of a better investor confidence climate.

In the same way, if the optimistic expectations of a good monsoon materialise, this will also help improve the government’s ability to toe the Budget line.

As mentioned before, while there is - unsurprisingly, in our view - no new “spectacular” or “game-changing” element in this Budget, the government needs to be credited for a serious and - all in all - credible enterprise of trying to accommodate sometimes conflicting objectives and pressures into a pragmatic and, hopefully, efficient approach. There will, of course, be the usual wait-and-see period, but what was said yesterday in Parliament should contribute to turning the page on two years of stagnation that have truly dented the confidence of the international business community.

Yes, it is true that “the proof of the pudding is in the eating”; but knowing the odds and the difficulties of the context, one can be forgiven for feeling today more comfortable than yesterday about India's prospects for the coming year.

Claude Smadja is President, Smadja & Smadja.

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