MS on top of PC”. This was the headline in a pink paper a decade ago. Obviously, the newspaper was punning on Dr Manmohan Singh taking over as Prime Minister of the country and Mr Chidambaram as the finance minister. Little then did we realise that within a few weeks another MS — Dr Montek Singh Ahluwalia — would join the government as the Deputy Chairman of the Planning Commission. It was this troika that was supposed to herald further reforms and take the Indian economy to greater heights.
Much water has flowed down the Yamuna since then. Twelve successive quarterly GDP growth figures beginning April-June of 2011 and up to January-March of 2014 demonstrate that the Indian economy is on a downward spiral. The Dream Team of Dr Manmohan Singh, Dr Ahluwalia and Mr Chidambaram has been nothing short of a disaster.
It is in this background that the new finance minister, Mr Arun Jaitley, goes on to present his budget. The singular challenge, therefore, would be to arrest this downward spiral and put Indian economy on a growth trajectory. For this, the government must rein in the fiscal deficit. And for starters, the finance minister is well advised to lay bare the ingenious accounting of his predecessor to the nation and tell the truth and nothing but the truth regarding the actual fiscal deficit, which has been kept outside the government books till date.
This is easier said than done. To achieve a lower fiscal deficit, the finance minister has to augment revenues (difficult in the days of weak economic growth), contain subsidy (again difficult owing to vested interests) and increase spending on specific heads (namely defence, capital expenditure). If we go by the experience of past budgets, typically, the finance minister cannot cut any expenditure relating to non-plan revenue (comprising interest, salaries and other expenses for running the government) and plan revenue (which are determined by the Planning Commission through five-year plans and commitments are made to the States). Consequently, the haircut, if at all possible, would be on non-plan capital (comprising defence equipment purchases) or plan capital (on augmenting production capacities). In short, the finance minister has very little elbow room. Finance ministers arrogate to be the lord of all that they survey.
But controlling the fiscal deficit is not merely an arithmetical exercise; it is psychological. Let me amplify. Reforms post-1991 mandate rolling back the presence of government in areas where it need not be and simultaneously expand in areas where it should make its presence felt. Primary education is one such area begging for attention of the government since Independence. The UPA government introduced a two per cent surcharge on all taxes to fund the primary education. A decade later, not much improvement is seen despite this surcharge. Put simply, it is not the revenue that matters but an out-of-the-box thinking to remedy the situation. For instance, if the finance minister mandates that all children of government servants should mandatorily be schooled in government schools, the quality of education would primarily undergo a tectonic shift. Unfortunately, even children of teachers in government schools attend private schools.
Another dimension to controlling fiscal deficit is that it must be an article of faith for the finance minister. Much as it would be tempting for him to dole out a largesse here or a largesse there, the fact remains that it would naturally come with governmental interference — the very antithesis of reforms process. This requires a further elaboration.
India is ranked 132 out of 190 countries in the ease of doing business index. Much of this is primarily because of the interference of government in the economy. Experts believe that the new Companies Act 2013 (the finance minister is also the minister for corporate affairs) will push India further down in the ease of doing business index. Again, this has nothing to do with fiscal deficit, but if the finance minister controls fiscal deficit, he must also concomitantly tell us the specific areas he intends to roll back government’s interference in business. If he fails to address this leg, controlling fiscal deficit would be merely rhetorical; an empty exercise in semantics.
Another challenge before the finance minister is to get his audience right. There is an overwhelming temptation to address the foreign investors and large institutional players. Most finance ministers lose sight of the fact that India is a Savings Economy and one-third of our GDP is saved. India’s investment rate is approximately 35 per cent of her GDP. It is the difference of 2-3 per cent of the GDP that is funded by the foreign investors—FDI or FII. Indian savings approximately fund 93 per cent of our investment requirement. Yet, successive budgets in the past have placed a disproportionate emphasis on the marginal seven per cent disregarding the 93 per cent.
The finance minister must focus on this domestic aspect. For starters, he could make his budget speech in Hindi which would address the domestic audience rather than the foreign investors. This again is not merely theatrical but is profoundly psychological. If he is conscious of the fact that his budget and his speech is directed towards the domestic audience, the content of the budget would at once not be peripheral but substantially directed towards domestic businesses, domestic consumers, domestic savers and domestic investors.
Mr Chidambaram and Mr Jaitley have several things in common. Both are senior advocates in the Supreme Court, suave, persuasive and are darlings of the middle class. Unfortunately, the nation mistook the good English of Mr Chidambaram as good economics. One hopes that Mr Jaitley does not commit the same mistake as his friend.
