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Bhelpuri economics: A please-all Budget


It was a tightrope walk between pragmatism and populism. The finance minister performed the balancing act with noteworthy skill on February 28, writes KS Narayanan.
KS NARAYANAN. | Issue Dated: March 8, 2013, New Delhi
Tags : FM | P Chidambaram | Sonia gandhi | Union Budget | UPA II | General Elections 2014 |

On February 28, Union Finance Minister Palaniappan Chidambaram presented UPA's last Union Budget. Amidst gaping deficit, a global crisis, a scam-ridden government suffering from policy and decision paralysis, anti-corruption protests in the run-up to the General Elections, he chose a middle path to placate various constituencies to spur the economy.

Despite giving a raw deal to the middle class by levying service tax on dining and wining in air-conditioned restaurants and taxing the superrich, the Finance Minister was able to win appreciation from the India Inc., which described the Budget as growth-oriented and designed to kick start the next round of investments to revive a stagnant economy.

CII President Adi Godrej acknowledged that the budget would boost growth, curtail inflation and help in ratings. “Plan expenditure has been raised by almost 30 percent, and inflationary pressures due to supply side measures are sought to be dampened. This would encourage further monetary steps to lower interest rates, which would spark investments. The expenditure on education and healthcare has been increased substantially, while skill development has received a big boost. This is in line with CII's emphasis on enhancing human talent capacities,” Godrej pointed out.

Assocham Secretary General D S Rawat said: "The Finance Minister has presented a bold and pragmatic Budget. It is investor-oriented and growth-oriented." FICCI president Naina Lal Kidwai said the Budget seems like a responsible one, but cautioned that one must look at the fine print to see where the government will be spending before we rejoice.

Dr Mahesh Y Reddy, Director General, Infrastructure and Logistics Federation of India (ILFI), said that the Budget contains many redeeming features that can infuse much-needed buoyancy in the economy in general and infrastructure in particular. “Corporates have attached a lot of importance to the Budget, primarily to consolidate the slow recovery that is taking place. Some of these measures will help revive the economy,” Dr Reddy observed.

The presentation of Union Budget 2013-14 coincided with the rapid change in the global economic scenario of raging oil prices and economic meltdown, ravaging particularly the EU community and USA, both of whom are India’s major trading partners, and worries of current account deficit (CAD). Current account deficit occurs when export revenues shrink and import costs go up resulting in higher trade deficit and lower net inflows such as FDI, FII and remittances from abroad. With exports remaining slow and imports staying high due to inelastic demand for crude petroleum, edible oil and gold, India needs more and more inflows to bridge the gap.

Chidambaram’s argument is that the country’s exports have to rise substantially so as to pay for the imports. Only then CAD can come down. India has to import crude oil and oil seeds in the short run because the country needs it. But does India require so much gold for jewellery for the people which is adding up to import costs because of the unprecedented price of gold is the question. Nevertheless the government has brought down taxes on jewellery drastically from 6% to 2% and relaxed restrictions on baggage allowance to allow women passengers to bring gold or gold jewellery valued up to Rs one lakh and male passengers up to Rs 50,000. Chidambaram, however, said he proposed to bring in alternatives to gold.

The Finance Minister feels that CAD can be best managed by increasing crude oil production in the county and so also oil seeds production so that imports come down and valuable foreign exchange is saved. India now has foreign currency reserves of near US $300 billion, enough to pay for its crude oil or imports for another six months. But the foreign exchange accretion has to be continuous so that what is spent is replenished.

"I can only appeal to people, if we don't import gold for a year, half of our current account deficit will disappear," Chidambaram told the audience during a social media chat last week. To address the issue, Chidambaram and his team will go all out to attract higher investment by FIIs. Sebi chairman UK Sinha will meet portfolio investors to address their concerns.

No wonder global credit rating agencies busy in the business of crediting and discrediting economies have taken note of Chidambaram’s budget. Moody’s Investors Service, in its credit outlook, said, "India announced that the central government's budget deficit for the fiscal year ending 31 March 2013 would equal 5.2% of GDP, and that it would target a deficit of 4.8% of GDP in fiscal 2014. This plan of modest fiscal consolidation is credit positive for the sovereign because, against a backdrop of subdued GDP growth and upcoming elections, it is a realistic effort to correct India's macroeconomic imbalances."

Moody's is the only one of the three major credit agencies to have maintained its "stable" outlook on India's ratings. Standard & Poor's and Fitch projected a "negative" outlook for the country.

With global rating agencies watching decisions of top policy makers in India, the budget mathematics will assume that the UPA government will take hard decisions in the coming financial year though it can’t possibly reverse the damage inflicted over the last couple of years due to indecision.

Chidambaram realises this better than anybody else. “The economy is indeed challenged, challenged in a number of ways. The Budget is not a one-stop or one-step measure. More decisions will be announced during the passage of the Budget and the Finance Bill in Parliament,” the FM said in his post-budget interaction.

Due to these reasons, many captains of industry and sectoral experts dubbed the Budget as pragmatic considering the current constraints.

After addressing the concerns of India Inc, investors and credit rating agencies, the Harvard-educated Chidambaram turned his attention to measures to reap a political harvest in the General Election that is 14 months away from now.

The credit should go to Congress high command for devising both the farm loan waiver and NREGA that boosted the electoral prospects for the party twice. Chidambaram, who has presented eight budgets since 1996, reflected principles of inclusive and sustainable development preached by many, including UPA Chairperson Sonia Gandhi and Congress Vice President Rahul Gandhi on one hand, placated Left Parties by quoting Noble Prize-winning economist Joseph Stiglitz on the compelling moral case for equity and rejected Gujarat Chief  Minister Narendra Modi's model of development that left behind women, the scheduled castes, the scheduled tribes and the minorities.

Without making a direct reference to Modi, Chidambaram observed in his Budget speech: "We have examples of states growing at a fast rate, but leaving behind women, the scheduled castes, the scheduled tribes, the minorities, and some backward classes. The UPA does not accept that model. The UPA government believes in inclusive development, with emphasis on improving human development indicators. I hope this Budget will be yet another testimony to that commitment."

So the focus on women, youth and poor was deliberate as these segments have formed the backbone of the Gujarat Chief Minister's success story. So it is loud and clear that the Congress has now sounded its poll bugle by trying to woo these sections back.

While doing so, the FM was merely reflecting the lessons from the chintan shivir held in Jaipur in January this year, when Sonia Gandhi and her son Rahul had made pointed references to these sections in an attempt to persuade them to come back to the Congress fold. "I wish to draw a picture of three faces that represent the vast majority of the people of India. The first is the face of a woman. She is the girl child, the young student, the sportswoman, the homemaker, the working woman, and the mother. The second is the face of the youth. He is impatient, she is ambitious, and both represent the aspirations of a new generation. The third is the face of the poor who look to the government for a little help, a scholarship or an allowance or a subsidy or a pension. To each of them, on behalf of the government, the PM and the chairperson of the UPA, I make a promise," Chidambaram said.

Interestingly, most of announcements made in the Union Budget can be found in the Congress Manifesto of 2009. For instance, the Congress Manifesto mentions Health Insurance Cover across all BPL families; Rashtriya Swasthya Bima Yojana was introduced in 2009 budget that covers 34 million families below the poverty line has now been extended to other categories such as rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers; Rs. 1000 crore has been allocated in 2013-14 for Scheme for setting up of 6000 Model Schools at Block level promise made in the manifesto.

Similarly, the decision on an all-women Bank too was a promise that was made by the party in the manifesto. There are more than two dozen decisions in the Union Budget that aremerely a reflection of the promises in the Congress Manifesto. Barring the Women’s Reservation Bill, the UPA II made a forward movement in most of these promises.

However, there are not many takers and experts who know well how to read the fine print behind the budget numbers. Says Subrat Das, Executive Director, Centre for Budget and Governance Accountability: “The speech of the Finance Minister for Union Budget 2013-14 was high on rhetoric for inclusive development, but the allocations provided for social sectors, MGNREGS, food subsidy and social security schemes all indicate the unwillingness of the government to increase the budgetary resources for these sectors. The FM acknowledged the need for ‘paying special attention’ to disadvantaged sections of the population, but the attention paid to disadvantaged sections in terms of the resource allocations in the Budget falls far short of the requirements at the present juncture”.

No wonder Chidambaram would have to do a tight rope walk to address the concerns of credit rating agencies, India Inc and FII with investment friendly policies even as he has the tough task of wooing millions of voters suffering from raging inflation ahead of General Elections in 2014.

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Posted By: Raj Saini | Mumbai | March 14th 2013 | 13:03
Brilliant write-up!

Issue Dated: Apr 27, 2014