The author is former director general, National Council for Applied Economic Research and chairman, Central Electricity Regulatory Commission
Jaswant Singh is aloof, taciturn, does not make rash commitments, has the full confidence of the prime minister, and the reputation of getting difficult tasks done. His “action taken report” compares favourably with that of his predecessor. He has significant achievements as external affairs minister, having transformed the relationship with the United States of America after the Pokhran nuclear explosions. He has already changed the situation of the Unit Trust of India, is on course to sort out the mess in the financial institutions, significantly improved the powers of the Securities and Exchange Board of India while cracking the whip on its unwise promotions.
The Kelkar reports have brought much greater transparency and public consultation to the budget-making process. The streams of businessmen, economists, farmers, labour leaders and others holding forth on their pet ideas have been replaced by serious comment and criticism by experts and public on draft proposals. The scrutiny by a group of government politicians gave the required political input. Politicians have to lead opinion, but they must remain in power. Any budget has to consider its effects on elections, and to call a budget an “election budget” is a tautology. Unlike earlier budget speeches, he did not tantalize, but unveiled his major proposals at the outset.
If there is a philosophy behind the budget, it seems to be a betting on growth to cut the percentage of deficit, public investment as its major driver, stimulating consumer demand for products with high economic multipliers like vehicles, textiles, and so on in order to stimulate growth. There is also a commitment to continuing liberalization of the economy. But the focus is very selective and is very much on the urban industrial economy. It is not holistic but bitty. For example, it does not look at healthcare as a whole but only chiefly at medicines, equipment and commercial hospitals. The new health insurance plan is imaginative, but must not be confined to state-owned insurance companies.
In my column in October 2002, I had pointed out that the world economy might be entering a period of volatility in the business cycle, following the bursting of the biggest bubble in American history and we must expect a protracted period of slow growth. The Central Statistical Organization had announced that between March and June 2002, the economy grew by 6 per cent against 3.5 last year and 5.4 in 2000-01. This “turnaround” is said to have been in all sectors. For the year its estimate is now down to 4.4 per cent. The CSO’s past annual national income estimates have almost invariably been revised downwards, between the “quick” estimates and the “final” estimates. There were adverse factors: drought over most of the country, continuing rise in domestic prices of petroleum, oil and lubricants, rise in international prices of oil and gas, prospects of war in Iraq, the possibly temporary nature of the upsurge in exports, pressures on government expenditures and on its compulsions to borrow, bailout of UTI, Industrial Financing Corporation of India and Industrial Development Bank of India, drought relief to states, rising defence and national security expenditures, the securitization of the oil-pool deficit and the consequent increase in government debt, and likely resurgence of inflation with economic revival. But in an uncertain world, all forecasting must provide for some catastrophes. Neither Yashwant Sinha nor Jaswant Singh do so.
There is nothing about implementing the Rangarajan report that wanted to improve the quality of Indian statistics and free it from the politicians and the bureaucracy. He seems to assume a growth next year of 6.2 per cent. The high risks are the monsoons, world economy, oil prices, Pakistan and effects of the imminent invasion of Iraq.
Savings for the first time are running ahead of investment. Public investment and overall capital formation have been decelerating. While the budget and actions on financial markets might improve capital formation, investment and savings in the urban economy, that is not so for the rural economy. For most of the Nineties it has declined in real terms in agriculture. The budget talks much, but provides practically nothing to improve it. The current account surplus means that we are not getting foreign investment either. Without investment growth, what economic growth can we sustain'
Low inflation was partly due to poor demand and growth, and is now rising, especially because of fuel prices. These will go up further with declining American surpluses, and the Iraq invasion. Another inflationary factor if the economic revival continues is the deficit, at 10 per cent for the Centre and states last year, now back to 1991 levels. The accretion to foreign exchange in the last year was mainly due to the reverse flows of funds stashed abroad, coming back for security, to raise equity control over companies and repay loans that could otherwise now attract the attachment of assets.
There is no sign that governments are soon going to improve the financial viability of state-owned enterprises. Electricity is a prime reason for state deficits and there is no political consensus on making it viable. The long unborn electricity bill, 2000, is not the panacea that the finance minister seemed to suggest it was. Disinvestment is still a contentious issue among all political parties. State-owned enterprises would remain to burden the government. The budgeted revenues on disinvestments and tax may be optimistic, and hence also the deficit.
The reductions in excise duties on a variety of products mostly with high multipliers, for the first time backs on increased consumer spending to stimulate manufacturing and the economy. It marks a sharp divide with the past. Interest rates had been frozen at very high levels after the inflation of the Seventies. So were real rates after allowing for inflation compared to other countries. They put Indian companies at a disadvantage in foreign markets. Foreign companies could better compete and take over Indian companies in India because of lower capital costs. High spreads between borrowing and lending rates for banks put a premium on their inefficiency.
Singh has boldly changed the interest structure by reducing them on small savings schemes like the public provident fund and post office savings. The result is that it has reduced the single largest element in government expenditures, namely interest payments. Lower interest costs chiefly explain his fiscal magic. The deficit is not higher despite the bonanza to the middle class while apparently increasing public investment significantly, providing protection to the aged, and continuing the reduction in import tariffs, but without implementing the Geethakrishnan commission recommendations on expenditure reform. The secret is the lower interest costs.
The budget speech mentions a new mechanism to improve the efficiency of public expenditures while evening them out over the year, but there are no details. He has increased fertilizer prices, but there is nothing about raising user charges even for services under Central government control. Relaxations on overseas expenditures may reduce the pressure towards a stronger rupee and so help exports. The independent regulatory mechanism must be strengthened, but there is no mention of this. Perhaps he did not want to confront the most obstreperous minister in the government, Ram Naik.
Singh’s budget rightly focusses on growth and economic revival. His major proposals to raise public investment, agricultural investment, and improve expenditure efficiency are mere words, not backed by money. The massive infrastructure investments proposed, are mainly to be made by the private sector, though the mechanism is not spelt out. There is no significant investment in agriculture on major and minor irrigation, rural roads, storage, and so on. It does nothing to improve efficiency in government, nor reduces overstaffing. The fiscal deficit is a sword of Damocles that could trigger runaway inflation. It is a patchwork quilt of a budget. Rightly, it has an eye to the elections. But it misses the opportunity for courageous actions to address serious issues in the management of the economy.