India’s Budget: Trying to Please All of the People, All of the Time

  • Share
  • Read Later

I can remember a time not so long ago when journalists covered the unveiling of India’s annual budget using the classic “man on the street” interview. Farmers, housewives, shopkeepers and students all got their say on the government’s latest set of subsidies, taxes and signals about the country’s financial and political priorities. They are the aam aadmi — the common man — and their votes decide elections.

The Indian government and its breathless cable-news channels now cater to a new constituency — big business — and their influence was on full display yesterday during Finance Minister Pranab Mukherjee’s annual budget address. The India Habitat Center, a conference center/private club/restaurant complex in the heart of posh South Delhi, was taken over by “viewing parties” organized by a trade group, the Confederation of Indian Industry. CEOs from many of India’s biggest companies gathered to watch Mukherjee’s budget presentation to Parliament on flat-panel televisions and, thus conveniently corralled, stepped out to give their opinions to waiting reporters from every major news channel, whose vans and generators filled the parking lot.

As a voting bloc, CEOs are insignificant compared to, say, the 1.4 million people employed by the Indian Railways, but their opinions are increasingly important. Battered by allegations of corruption, the ruling Congress Party is riding  a wave of strong economic growth and hoping it will last until the next elections in 2014. It needs to keep both chief executives and train conductors happy.

That’s a tricky balancing act.  Business is wary of anything that widens India’s fiscal deficit because government borrowing crowds out private investment. The rest of India is much more concerned with soaring food prices and is desperately looking for some relief. So Mukherjee announced that social spending will rise an extra 17% next year—that includes indexing wages in its flagship rural jobs program to inflation; doubling the salaries of 2.2 million “anganwadi”, village child care center, workers; and introducing a national food security bill.

How to increase all those subsidies and shrink the deficit at the same time? It helps to make the right assumptions. Mukherjee assumes that economic growth this year will be 9%, generating 17.8% more tax revenue — just enough to pay for all those benefits and a little more. The optimistic result is a slight decline in India’s fiscal deficit, which topped 10% of GDP last year.

The headlines this morning mostly praised Mukherjee’s political tightrope act. “He eyes growth, watchest cost”; “Pranab Plays It Safe”; “Less is More.”

Swaminathan Aiyar was one of the few to highlight this budget’s true innovation: “a conceptual breakthrough in delivering subsidies through cash transfers for kerosene, fertilisers and cooking gas.” The cash transfers will replace a complex corruption-prone system in which the poor are supposed to be able to buy discounted oil and gas at ration shops. In reality, much of it goes to the black market and the notorious so-called “oil mafia”.

The cash transfers will go into effect next March. If India can get this right, it might even attempt to reform its massively inefficient foodgrain subsidies. As Kaushik Basu, India’s chief economic adviser, has boldly noted in a recent paper:

“The statement by a senior member of this government that, when it comes to hoarding, it is the Government of India that leads the pack is not off the mark.”

Reforming these two outdated systems would put more money in the pockets of the poor, easing the inflation burden on them and the fiscal burden on the budget. That’s something the common man and the CEO can both cheer.