For a while now, the performance of the Indian economy has been driving supporters of India worldwide to the sort of frustration that is often experienced by parents and teachers of a gifted teenager whose behavioral issues come in the way of fulfilling his or her enormous promise.
Once the poster child of growth, the Indian economy has been having a bumpy ride in the past few years, with growth slowing down and investor confidence taking a major hit. In fact, in the past couple of years, the ride has been so rough that, when compared to the heady days of the 2000s, it was akin to switching from the Delhi-Gurgaon Expressway to one of the potholed roads in rural Haryana.
Friends and well-wishers of India abroad had been waiting eagerly to see what prescriptions the budget of P. Chidambaram — his first in the third avatar as finance minister — would have to put the economy back on track.
Chidambaram raised a great amount of expectations about the budget because of some of the moves that he made since taking over the reins of the Ministry of Finance last August had reassured the global investment community.
When he took over, a Damocles’ sword was hanging over the economy in the form of a potential downgrade of India’s credit ratings. A downgrade would have meant, besides the economic consequences, India suffering the ignominy of becoming the first among the famed BRICS quintet – Brazil, Russia, India, China and South Africa – whose bonds are deemed junk.
Chidambaram seemed to have warded off that threat, for now. Also, in the first few months, he addressed a number of longstanding concerns investors had by taking measures to control public spending, stabilize rupee and avoid a balance-of-payments crisis.
Therefore it was expected that the budget would signal a continuation of the sound policy proposals of the first few months. At the same time, it was also a no-brainer that, since this may well be the last budget of the United Progressive Alliance government before the next general elections, it would also contain plenty of populism.
On both fronts, the budget was along the predictable lines.
Chidambaram deserves a lot of credit for trying to bring some sort of fiscal discipline by limiting the public spending. In his budget speech, the minister said that fiscal deficit in the current year “has been contained at 5.2 per cent” of the Gross Domestic Products and he vowed to “bring it down to 4.8 per cent by 2013-14.”
Overall, the budget also contained a number of other proposals that would go a long way in boosting the economy in the long run. For instance, the proposal to build seven new cities is a much-needed infrastructure investment. Most major Indian cities are unable to withstand the pressure of population moving from villages to cities. The new cities would go at least some way in addressing this problem.
Similarly, allocating more money for women, including the launch of a Women’s Bank, which in Chidambaram’s own words, “lends mostly to women and women-run businesses, that supports women SHGs (self-help groups) and women’s livelihood, that employs predominantly women, and that addresses gender related aspects of empowerment and financial inclusion,” is also a sound move, which will, in the long run, spread the prosperity around.
Now that the budget is out of the way, the finance minister needs to continue to address all the bottlenecks that are becoming obstacles in the growth of the economy. The issues he needs to tackle include:
- Further reducing the subsidies, which are a huge burden to the exchequer,
- building infrastructure, especially in power sector,
- making land acquisition, which is one of the biggest problems in India, less cumbersome, and
- Opening up the markets in the areas of pension and insurance.
However, Chidambaram’s first and foremost job, as the man in charge of the $2 trillion economy, is to sell the reform to the political class that he belongs to.
It is clear that even two decades after it was launched, intellectually, a huge chunk of India’s political class has not fully bought into it. As a result, quite stunningly, many Indian politicians still fail to recognize that the spectacular growth the country recorded in the past decade and a half was because of the reform.
As the Economist noted, while the finance minister “spoke in the chamber, most spending rises were cheered and met with a thumping of desks, not least by Sonia Gandhi, the dynast who heads the ruling congress party. Mr Chidambaram’s pledges on improving the investment climate and attracting manufacturing investment, however, were met with icy silence.”
Pranab Mukherjee, Chidambaram’s predecessor as finance minister, had said repeatedly that reforms were irreversible. Mukherjee, now the President of the republic, may have been earnest in that belief, but the actions of his ministry and the government did not always reflect that. The government acted on reforms only when it was pushed to the wall.
Part of the reason for the inaction was the lack of a broad-based consensus on reforms among political parties, which is absolutely necessary for going ahead with the structural reforms.
Maybe it is time for Chidambaram and his boss, Prime Minister Singh, to show some leadership by doing a better job of selling reforms to not just the general public, but also to the country’s politicians.