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Sweet smell of radicalism

This budget turns towards responsible fiscal policy. Can one ask for more?

Written by Surjit S Bhalla |
March 1, 2011 10:56:11 pm

For the first six years of its tenure,the UPA government has confidently been in populist tax-and-spend mode. It assumed that it won in May 2004 because the poor were not being helped by the NDA; and that it won in May 2009 because it went on a spending spree to help the poor. Then came the Bihar election of November 2010. I believe that that election will be remembered as a watershed in Indian economics,and politics.

And it already has had an effect on the budget.

Before the budget,there was a lot of discussion as to how much social expenditures will go up and therefore destroy any attempt at fiscal consolidation. No one expected much from this classic tax-and-spend government. And the UPA has had more than six years at practice; each year,surprised by the GDP growth and tax revenues,the UPA government increased social expenditures to such a level that allocations were not being spent!

Until the Bihar elections,and high unsustainable inflation for the last three years. After averaging close to 4.5 per cent per annum for the long period 1996 to 2007,inflation has registered above 7 per cent for each of the last three fiscal years. RBI Governor D. Subbarao more than broadly hinted that there were precious few tools left in the monetary cupboard to attack this inflation; and that a necessary condition for inflation to be brought under control was that the fiscal situation improve.

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Now there are two ways by which the fisc can be brought under control. The first method is to increase taxation; the second is to decrease the rate of growth of expenditure. There is a golden third method,one rarely chosen by Indian politicians,especially those belonging to the spend-loving Congress party. It is to not increase taxation,and only reduce expenditure growth.

To everyone’s surprise,and certainly mine,the finance minister has chosen this third option. It is such a surprise that in informal discussions with experts,the common refrain is — it can’t be so,that the government in effect is lying. That is the depths to which the credibility of this government has reached.

My belief is that the government is not lying. And not because I think that nobility is at the core of this government. It is that from Libya to Lucknow and from Cairo to Calcutta,governments have no place to hide,or lie,anymore. Before,there was no policeman for the government sector,no authority that could expose governments. Today,technology and civil society and media are the new “police”. If you lie through documents like the Union budget,you will be exposed and lose elections faster than you can say Raja. It is okay to be cynical,but not to be naively so.

Let us look at some hard numbers on expenditure in India. In 2009-10,the government had budgeted a total expenditure level of Rs 11,09,000 crore for 2010-11. What actually happened? The spending level was actually about 10 per cent higher,at Rs 12,16,000 crore. Revenue growth in excess of budgeted estimates was also 10 per cent higher,so the excess expenditure growth was not felt on the fisc.

For 2011-12,the government has budgeted the following. First,nominal GDP growth of 14.1 per cent — and,though the break-up is not given,it should roughly be in the zone of 8.5 per cent GDP growth and 5.6 per cent inflation. The numbers are consistent and seem broadly accurate. Tax revenue growth is budgeted at 18 per cent,which,given a nominal GDP growth of 14 per cent,is also realisable. The reduction in effective tax rates via exemption-slab expansion should help compliance and tax buoyancy. But,and this is the key point,total expenditure growth is budgeted to increase by only 3.3 per cent!

A perspective on this expenditure growth is that if realised,this will be the second slowest expenditure growth in Indian history since 1970-71. The lowest realised growth: 1.5 per cent,in 2005-06. In that year,the UPA government was committed to sensible macro policies,before the rot set in. The lesson from Bihar is unmistakeable: good politics is good economics. With its back to the wall,more than any government since 1991 (or before),the UPA government is doing what is absolutely necessary for its survival.

This is not a workmanlike budget; this is not a conventional budget. It is radical. It smells of good economics. Expenditures on infrastructure and education have increased. Capital flows have been eased,and investment encouraged. Taxes have not increased. And there is a commitment to and planning for further disinvestment. It is likely that this budget is a major turning point in India’s fiscal history. In short,a brilliant budget,one exceeding all expectations.

For that,the finance minister and the budget-makers need to be congratulated.

The writer is chairman of Oxus Investments,an emerging market advisory and fund management firm

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First published on: 01-03-2011 at 10:56:11 pm
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