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Will the gamble pay off?

FM Pranab Mukherjee’s Budget has evoked a mix of reactions. Some have hailed it as a fine balancing act between political expectations and economic compulsions, while others have derided it as a Budget that lacks vision and is short on reforms, writes Rajesh Mahapatra.

india Updated: Jul 07, 2009 23:28 IST
Rajesh Mahapatra

Finance Minister Pranab Mukherjee’s Budget has evoked a mix of reactions. Some have hailed it as a fine balancing act between political expectations and economic compulsions, while others have derided it as a Budget that lacks vision and is short on reforms. Some have even described it as the first socialist Budget in the post-reform era. There is a bit of truth in all of these reactions. But what concerns some of us the most is the gamble on growth and the big risk that the minister has taken by allowing a fiscal deficit that’s a record in more than a decade.

Mukherjee is not the first finance minister to pin hopes for revival of growth on government spending. His predecessors have done it many times, but the results have not always been the same.

It worked in the 1960s and 1970s, but the philosophy of sustaining high growth through deficit financing in the 1980s landed the country in a fiscal mess that eventually grew into a crisis of balance of payments in 1991.

Prime Minister Manmohan Singh, who is credited with having bailed the country out of that crisis, also allowed fiscal deficit to swell much beyond the target in 1993-94. The result at the time was somewhat encouraging, with growth peaking to a new high in the next two years.

Yashwant Sinha, who was the finance minister in the NDA government, tried to do just that in his Budget for 1999-2000, but the outcome was not so pleasing. The economy grew 6.4 per cent in that year, but the growth rate slipped sharply to an average of 4.7 per cent in the following three years.

Like Mukherjee, Sinha was also burdened with a huge spillover of pay revisions announced by his predecessor P. Chidambaram, who was the finance minister in the United Front government of 1996-98. Sinha couldn’t spend his way out, as the dotcom bubble burst and the global economy slipped into a slowdown mode.

Mukherjee too faces a similar risk, with the difference that the current inflation rate is somewhat benign, providing more elbow room for a high fiscal deficit. If the so-called “green shoots” of recovery actually translate into a full-blown revival of the global economy, Mukherjee’s gamble might pay off. The strategy underlying his Budget would stand vindicated. That said, the finance minister has shown maturity in striking a balance between continuity and change.

He has continued with policies that — as many within the UPA government believe — have not only yielded a rich electoral dividend, but have largely helped insulate the vast rural economy from the global downturn. The generous hike in allocations for National Rural Employment Guarantee Scheme (NREGS) and social sector projects is a reflection of continuity. On the other end, there are some significant departures from the past.

The stance on financial sector liberalisation, as reflected in the references to the virtues of nationalisation of banks by Indira Gandhi, is a change guided by the global financial crisis. His statement that the government would look to revive divestment in public sector companies is a change that has come with an altered political context, wherein the UPA is no longer dependent on the support of the Left.

Mukherjee has also gone back on some of the taxation changes — and the principles behind them — brought about by his predecessor P. Chidambaram. These include the abolition of the surcharge on personal income tax, fringe benefit tax and the commodity transaction tax. At the same time, he has promised to continue with the ongoing process of simplifying tax rules, eliminating the plethora of exemptions that breed inefficiency in the taxation system and widen the tax net.

A second look at the Budget proposals would thus suggest that the finance minister has done a fairly good job, even though there is no big bang and a huge risk on the fiscal front. He can do little if the world economy fails him, and you.

Finance Minister Pranab Mukherjee’s Budget has evoked a mix of reactions. Some have hailed it as a fine balancing act between political expectations and economic compulsions, while others have derided it as a Budget that lacks vision and is short on reforms. Some have even described it as the first socialist Budget in the post-reform era. There is a bit of truth in all of these reactions. But what concerns some of us the most is the gamble on growth and the big risk that the minister has taken by allowing a fiscal deficit that’s a record in more than a decade.

Mukherjee is not the first finance minister to pin hopes for revival of growth on government spending. His predecessors have done it many times, but the results have not always been the same.

It worked in the 1960s and 1970s, but the philosophy of sustaining high growth through deficit financing in the 1980s landed the country in a fiscal mess that eventually grew into a crisis of balance of payments in 1991.

Prime Minister Manmohan Singh, who is credited with having bailed the country out of that crisis, also allowed fiscal deficit to swell much beyond the target in 1993-94. The result at the time was somewhat encouraging, with growth peaking to a new high in the next two years.

Yashwant Sinha, who was the finance minister in the NDA government, tried to do just that in his Budget for 1999-2000, but the outcome was not so pleasing. The economy grew 6.4 per cent in that year, but the growth rate slipped sharply to an average of 4.7 per cent in the following three years.

Like Mukherjee, Sinha was also burdened with a huge spillover of pay revisions announced by his predecessor P. Chidambaram, who was the finance minister in the United Front government of 1996-98. Sinha couldn’t spend his way out, as the dotcom bubble burst and the global economy slipped into a slowdown mode.

Mukherjee too faces a similar risk, with the difference that the current inflation rate is somewhat benign, providing more elbow room for a high fiscal deficit. If the so-called “green shoots” of recovery actually translate into a full-blown revival of the global economy, Mukherjee’s gamble might pay off. The strategy underlying his Budget would stand vindicated. That said, the finance minister has shown maturity in striking a balance between continuity and change.

He has continued with policies that — as many within the UPA government believe — have not only yielded a rich electoral dividend, but have largely helped insulate the vast rural economy from the global downturn. The generous hike in allocations for National Rural Employment Guarantee Scheme (NREGS) and social sector projects is a reflection of continuity. On the other end, there are some significant departures from the past.

The stance on financial sector liberalisation, as reflected in the references to the virtues of nationalisation of banks by Indira Gandhi, is a change guided by the global financial crisis. His statement that the government would look to revive divestment in public sector companies is a change that has come with an altered political context, wherein the UPA is no longer dependent on the support of the Left.

Mukherjee has also gone back on some of the taxation changes — and the principles behind them — brought about by his predecessor P. Chidambaram. These include the abolition of the surcharge on personal income tax, fringe benefit tax and the commodity transaction tax. At the same time, he has promised to continue with the ongoing process of simplifying tax rules, eliminating the plethora of exemptions that breed inefficiency in the taxation system and widen the tax net.

A second look at the Budget proposals would thus suggest that the finance minister has done a fairly good job, even though there is no big bang and a huge risk on the fiscal front. He can do little if the world economy fails him, and you.