The Telegraph
Since 1st March, 1999
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- The political calculus behind the hard choices made in the budget

Most commentators on the first budget of the new Congress-led coalition have commented on its attempt at a new focus for economic policy. But what is of equal interest is the political calculus behind the hard choices made by the new finance minister. There are crucial elements of continuity here with his previous innings as the finance minister of the United Front in 1996-98. He was, as he reminded the country, “the first Union finance minister from a regional party in a genuine coalition”.

It is a measure of the times that, as finance minister of a Congress-led dispensation, he has now listed fiscal devolution among his key benchmarks. The easing of the interest rate on loans to states is only one step in this direction. Such a measure does not and cannot solve the deficit of the state governments. But it does give them a sense of relief on an issue that concerns all 28 of them. It also marks a contrast, which P. Chidambaram may not want to highlight but deserves recognition.

Two pillars of this government, one within the government and one without are the Dravida Munnetra Kazhagam and the Communist Party of India (Marxist). Both parties are articulate, committed and consistent advocates of greater fiscal devolution to the states. Both have in the past headed state governments at a time when the Union centralized powers and sought to encroach on functions legitimately in the realm of the state governments. In the 1991-96 era, one of the key instruments of bringing down the deficit by Manmohan Singh was to cut down on transfers to states. In 1996, one of Chidambaram’s first steps was the reversing of the trend. Now in 2004, though again a Congressman, he has brought to its notebook a sensitivity to federalism which he has not been associated with in the past.

Equally significant is the move to set up a fund for backward states. What is significant is not simply the quantum of money, some Rs 25,000 crore over a five-year period. Even here, the grants will draw together existing schemes with the Union making up the shortfall. The regional balance of competing interests is also evident in the packages and in specific policy measures. The Tamil-speaking region has been singled out. The ruling alliance swept all the seats in Tamil Nadu and Pondicherry this summer. The Sethusamdram project will significantly reduce the travel time of ships and give the port of Tuticorin a boost. The desalination plant in Chennai will be keenly watched. More important, the change in Cenvat meets a key issue raised by the textile industry in Maharashtra and Tamil Nadu, both of which have state assembly polls in the near future, one in a few weeks and the other within two years.

Bihar has been a beneficiary, although the package is nowhere near the Rs 40,000 crore demanded by the state’s leaders at the time of its bifurcation. The small programme for flood control for north Bihar and West Bengal will give Laloo Prasad Yadav’s party a platform when it tries to win a fourth term in office next year.

Much of the focus is on agriculture, agro-processing and rural employment. This is a welcome shift of emphasis from the previous National Democratic Alliance government, which acquitted itself very poorly during its last two years.The drought on 2002 was the worst in 35 years in the north but the Vajpayee cabinet did not even once meet to discuss strategies to combat it. Similarly, the extent of the water crisis in the four southern states and Maharashtra last year did not evoke a serious coordinated response.

The budget makes a beginning in addressing core issues that lie at the root of not only the constraints on economic growth but even social harmony and political stability. The Eighties and Nineties offer a picture in contrast in many respects, and it is these contrasts which underpin both the mandate and the challenges before the government. The gap between urban and rural incomes widened, the level of investment in agriculture slackened, and the rate of creation of farm jobs fell. Each of these issues requires a concerted effort especially in the states or regions that lag behind the rest of the country.

The core philosophy of the NDA till the pre-election packages of 2004 was to upgrade communications and roads. The only major big idea was the river-interlinking plan, a project that has been pilloried by most experts for being based more on hope than on practical possibilities. Contrary to many dire predictions, the new government has not chosen the tax-andspend route. Even its initiatives on the education, health and employment front are tentative. The strategy as with the water-harvesting programme is clear. A set of pilot programmes will first be put in place and the coverage will be extended over time.

To learn by doping is certainly a more prudent approach than to spend without coming to grips with the institutional problems that bedevil such projects.The finance minster quoted not only the Tamil poet, Thiruvalluvar, but also Jospeh Stiglitz. He drew on the latter to remind an interviewer that economic policies are based on both reason and care. One would be bereft of direction without the other. It is a different matter that the Congress, as a party, has historically been adept at straddling the divide in this country between the haves and have-nots. Defining either stratum is difficult, but the contrasts are evident in India.

In the early Seventies, the party tried to expand the reach and scope of governmental controls to widen opportunity and reduce disparity. The mixed economy model was given a further dose of control. Twenty years on, the party was dragged into the reform era by P.V. Narasimha Rao and Manmohan Singh. But after its rout in 1996, it has wrestled at how to reconcile market-led reforms with the widening of opportunities for the poor.

The picture in 2004 is, however, a vastly different one from eight years ago. In political terms, the party is now reliant on a mix of regional parties and the left. Neither can be dispensed with; in fact each has a critical corrective role. Each represents a distinct constituency which has to be placated even as the premier party tries to carve out a distinctive role for itself. But it is surely a measure of the times that the most sustained protest has come from the stock markets on the issue of the turnover tax. The greatest division in the ruling alliance is predictably on foreign direct investment.

The hard bargains will be on the issue of the provident fund, which affects the workers in the organized sector. The immediate concern will inevitably be the monsoon, now slackening in north-west India, raising the spectre of a drought-hit farm sector. The market may hold sway over economic life, but the monsoon still has a central role in the creation of wealth.

The budget is a step in a certain direction. But the test will still lie in the countryside. It is here that the core constituency of the ruling alliance is based, and it is here that it will be watched most keenly. Sooner rather than later, it will have to confront the critical issue of reforming the system of governance to ensure that its objectives are met. The litmus test is yet to come.

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