India’s Finance Minister Plays It Safe with 2010 Budget

“This Budget belongs to ‘Aam Aadmi’. It belongs to the farmer, the agriculturist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest. I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming years.”

With these words, India’s Finance Minister concluded the much-ballyhooed annual Union Budget Speech.

While there are plenty of schemes and sops for farmer and agriculturists – over $25 billion, about 10% of the budget, has been allocated to various schemes for rural development – there’s not much that is enthusing for entrepreneurs and investors. In his second budget after a conclusive election victory, the Minister has continued to reward his party’s core constituency and vote bank, not necessarily in ways that would actually empower or ameliorate them.

The Minister said that disinvestment would allow people to participate in the profits of public sector companies. The current program of disinvestment is a misnomer – “monetization” would be a more accurate characterization. The government proposes to sell minority stakes in public sector units to pay for the social sector schemes believed to help the bottom of the pyramid. Privatization and strategic sale of government-owned companies is what is actually beneficial to the economy.

Loosening government-control over companies results in more efficient management and lower prices for consumers, also freeing up capital for investment in critical areas such as infrastructure. India doesn’t need to borrow money from the World Bank to build roads. The raison d’être for disinvestment is change in management control, which the Minister is not achieving by monetizing minority stakes.

There are no bold pronouncements and no liberalization in this year’s Budget. All in all, it was devoid of vision and rather stale.

I don’t think India should be content with a GDP growth rate of 7% or 9%. The country’s true potential is at 12%-plus, for two reasons – India’s GDP stands at about $1.2 trillion and we are starting from a low base. Secondly, India’s demographic profile is also very amenable to support high-growth rates.

In fact, India has the best demographic profile among the BRIC countries – over the next two decades, over 240 million people will join the workforce, averaging nearly a million people every month for the next 20 years.

The Finance Minister and policy-makers in the Ministry have an affliction for introducing cesses, additional duties and special excise taxes. Maybe they should apply a special additional deflator of 3-4% to discount India’s real GDP growth rate – for a growth rate of 5-6% eminently qualifies as a recession given the country’s potential.

Short-sighted, politically-driven policy making year after year is holding the country back. We saw glimpses of what is achievable when there were reformist Prime Ministers at the helm, from 1991-1996 and 1998-2004. Without those years of breakthrough liberalization, nobody would ever think of classifying India as a world-power, and we’ve just scratched the surface.

But this year’s budget did have some silver linings. There is a clear political commitment to implementing a new direct and indirect tax code, which could be a significant step in taxation reform. The Minister also mentioned that foreign direct investment in retail could be allowed soon, a measure that has been long overdue.

Fiscal consolidation was the other major theme. The Government committed itself to cut its fiscal deficit to 5.5% of GDP, though the underlying  assumptions for achieving that target include sustained global economic growth, high revenue from and investor appetite for the equity monetization program in state-owned companies and auction of 3G telecommunications licenses.

This was particularly welcome given the difficulty European and other developed economies are facing in cutting deficits. India stands out in embracing fiscal responsibility, and it is a very welcome signal to foreign investors.

On a lighter note, the Minister exempted toy balloons from a central excise duty, acknowledging the joy mothers feel when their children played with balloons. He also reduced duties on corrugated carton boxes, latex rubber threads and pepper among other items. Though the Minister started his speech with a flourish, talking of how the Budget should be more than a mere statement of accounts, that’s now how the speech actually played out.

India’s potential remains untapped, as its political masters toy with the economy and important policy pronouncements.