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Budget 2008-09: The burden of expectations

Preparing for the election-eve budget, Finance Minister P. Chidambaram must have found the burden of expectations unusually high. Not only is he expected to provide the usual budgetary sops to please all but he is also called upon to correct the sense of drift that has come to mark the last one year of functioning of the United Progressive Alliance government and recapture the popular imagination. And this he has to accomplish without overly stretching either fiscal norms or his own credibility that will be called into question by a sudden show of solicitude at election time. Budgets are invariably characterised as pro-poor, pro-growth or pro-rich, depending on one’s perspective and if such labels can normally be shrugged off, they become particularly critical at this time.

In a sense, the Finance Minister will have to be riding the two horses of populism and fostering growth. For while this year’s budget can be expected to lean heavily towards giveaways, it cannot ignore measures needed to sustain economic performance. True the mood of industry and the markets does not necessarily translate into the mood of the electorate as the National Democratic Alliance government found to its cost when its overdrawn ‘India Shining’ campaign failed to resonate with the voters in the absence of any real change in the lives of the people. Yet, sullen markets and a downcast industry cannot lift the mood of the people on election eve. The trick then is to balance minimal tax sops to keep the markets in an upbeat mood with massive spending programmes that will strike a chord with the electorate.

For markets and industry, a sense of confidence and momentum to sustain what is sometimes referred to as their animal spirits would seem to be critical. Speaking of business cycles, John Maynard Keynes observed, “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” Six decades later, the Harvard economist Dani Rodrik was to invoke “animal spirits” to account for the spurt in India’s growth rate during the period of Indira Gandhi, well before the current reform era. In an explanation that is disputed by many other economists, Rodrik and Arvind Subramaniam assert that Indira Gandhi’s switch — reinforced later by Rajiv Gandhi — from hostility to support for business was “the key change that unleashed the animal spirits of the Indian private sector in the early 1980s.”

Be that as it may, by all accounts Mr. Chidambaram is on a good wicket. Three years of sustained high growth of around 9 per cent, high industrial growth rates and increasing corporate profits and the recovery of agriculture in the current year provide an enviable backdrop. Revenues from both direct and indirect taxes have shown a very healthy growth, providing a great deal of room for increased spending. Yet there are some disquieting signs of the international contagion stemming from the sub-prime crisis and the slowdown of the American economy spreading into India. Already, there are indications of foreign institutional investors pulling money out of the stock markets and of specific sectors such as information technology and business process outsourcing bracing themselves for the uncertain prospects in their biggest market. The rupee’s rise in terms of the dollar has again hurt the profitability of exporters of both services and goods. And to add to the uncertainty, infrastructure inadequacies — the result of three decades of gross underinvestment — and the shortage of highly skilled manpower are beginning to be felt across a wide range of industries.

In popular perception which is all important at election time, industrialists and stock market investors are not the most deserving of assistance from public policy and public funds. Yet, equally, the Finance Minister cannot afford to let the business mood turn sour and has his task cut out. With tax rates already down to below international levels, the scope for dramatic reductions or changes is very limited. On the other hand, specific incentives for investment through reliefs in the capital gains tax, for instance, or some relief for exporters hit by the rising rupee that does not infringe the World Trade Organisation rules on export subsidies may be necessary. Apart from the two areas of stock markets and exporters, the raising of the exemption limit for income tax and cuts in duties on some of the goods of common consumption are obvious measures because of their widespread appeal.

Even more important is the second type of sentiment, the mood of the electorate and Mr. Chidambaram is expected to conjure up high impact programmes out of his hat to create the feeling that the government stands for the common man and is addressing his problems. Over the years, a multitude of anti-poverty and social sector programmes have been introduced and there is little scope for novelty in the area. In purely electoral terms, social sector programmes can have three different types of impact. First, there are schemes involving higher spending on education, health, women and children’s welfare which are essential and have an impact over the medium and longer terms. While adding to its image as a caring government which is critical, they do not pay immediate dividends.

The second type of scheme involves providing productive employment for the rural poor earlier through the food for work programme and now through the National Rural Employment Guarantee Programme. The NREGP which is the showpiece scheme of the UPA government holds the promise of transforming the rural poverty scenario. Extended to all the districts from this year, it guarantees everyone in the rural areas 100 days of paid employment at the minimum wage. Because it involves physical labour, it is self-selecting in the sense only those who are really deprived would opt for it. It is to be seen first as a programme to build infrastructure and assets in the rural areas with minimal material and mostly labour. From the experience of the last one year, it is clear that it has had greater success in some areas such as watershed development than in, say, road building, the shortage of materials and indifferent planning being the main handicaps.

Whatever the drawbacks in the area of asset creation, the programme would still be justified for the second purpose it serves — as an income transfer programme, providing incomes for the rural poor. Here, because of its conceptual clarity and the governance structures it has put in place, it marks a sharp break from other programmes of this type that have become notorious for leakages — Rajiv Gandhi’s estimate two decades ago was that of every rupee spent on the poor, only 15 paise reach them. Employment programmes are prone to inflation of the muster rolls and short payment of wages, with the overseeing and supervisory staff skimming off a large part. Several features of the NREGP have gone to minimise the scope for such leakages. The grant of a statutory right to employment marks a paradigm shift from the earlier charity mode and with it has come an awareness creation programme that has had a major impact in areas where it is being implemented. The public display of the muster rolls, oversight by local governments at the village level and the involvement of non-government organisations in social audits have made for a substantial difference in the implementation of the programme. The only problem for the UPA is that it was perhaps one year too late in getting the programme off the ground to reap electoral benefits in full.

A third type of scheme is a pure giveaway which to have an impact has to be on a massive scale. At the level of the Union Government there have not been many of this type though several States have gone in for free power to farmers, highly subsidised rice and farm loan write offs. The question remains if Mr. Chidambaram will be tempted now to reach for such a scheme. If he does, an across the board farm loan write off suggests itself for both the boldness of the move and the extraordinary spread of its impact. It may be questioned on economic grounds for weakening the banking system and for creating a moral hazard and weakening the obligation to repay at a time when repayment is sought to be strengthened by such schemes as microcredit through self-help groups. And borrowers from banks who will benefit are typically not the poorest of the farmers. It will be interesting to watch what shape the farm package promised by Prime Minister Manmohan Singh takes.

The other question that remains is how far fiscal prudence will be stretched in expanding spending programmes. Revenue buoyancy will help fund some of the increase but the appetite of a government desperate to please the electorate would be enormous. The Fiscal Responsibility and Budget Management Act mandates a reduction of 0.5 per cent of the GDP in the revenue deficit and 0.3 per cent in the overall fiscal deficit this year and it remains to be seen if the Finance Minister would be able to meet this requirement after the inevitable spending spree.

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