labels: Economy - general, Government, Union budget: 2008-09
Budget populism, nuclear deal, elections and reform news
03 March 2008

Having tabled a populist budget before parliament, evidently because elections are not far away, the government should now launch an information campaign explaining how a strong economy created by economic reforms gave it the power to distribute benefits to the public, says Kiron Kasbekar.

The 2008-09 Union Budget of the United Progressive Alliance coalition government in India is not the first nor will it be the last budget to be dictated by pre-election populist compulsions. It's a moot point whether finance minister P Chidambaram needed to be so lavish in his largesse. Could he have met the Congress Party's pre-election imperatives with a little less? We don't know.

One thing we definitely know - and so do Chidambaram, Prime Minister Manmohan Singh and Congress president Sonia Gandhi - that the Indian economy, which has seen robust growth in the past four years, is in a far better position to absorb the adverse effects of such populism than it has ever been before.

As Subir Gokarn, chief economist, Standard & Poor's Asia Pacific, put it, "Taking everything into consideration … this is a very good budget, satisfying many while doing relatively little damage."

The "everything" that he has taken into consideration includes some formidable pluses as well as the whopping, Rs.60,000 crore farm loan waiver, the equally large subsidies on oil, fertiliser and food grains, and the imminent hike in government salaries with the implementation of the Fifth Pay Commission report. The basic plus is the strength of the Indian economy.

Budget fuel and nuclear trigger for elections
Juxtapose the budget proposals with the drama unfolding on the nuclear front. Negotiations with the International Atomic Energy Agency continue despite threats from opposition parties, and there is a good chance the government will take the next negotiating steps with the Nuclear Suppliers Group and the US after completing an IAEA agreement.

The coalition government is under intense international pressure to close the nuclear deal drafted with the US administration, which it sees as an enabler for India to gain access to nuclear and other technologies and to reduce its dependence on the import of increasingly expensive petroleum products.

Considering that the deal worked out with the US is probably the best that India is likely to get - or even get at all without also signing the Comprehensive Nuclear Test Ban Treaty (CTBT) - there is a good chance the government will go ahead with the negotiations and the signing of the nuclear deal despite protests from the opposition.

The government is worried that, if it goes ahead with the nuclear deal, loses the support of the Left parties and has to call for fresh elections, the deal may not be enough to persuade the electorate to vote the coalition parties back to power. After all, important as it may be for the Indian economy, the nuclear deal may not strike a chord with the masses.

But think of the nuclear deal along with a wide range of highly popular budget proposals. That would be a powerful combination of achievements, besides the rapid economic growth of the economy during the present government's tenure. The opposition parties will have a tough time beating such a plank.

The only issue is the timing. If the government allows too much time to elapse before going for elections, the benefits of these two planks get dissipated.

So be prepared for an announcement around June 2008 for an election to the Lok Sabha by the end of the year. Announcement on the nuclear deal will provide the trigger if the Left and other opposition parties oppose the deal.

Publicity drive on benefits of reforms
Would the coalition parties be able to breathe easy after that? They can never be sure. They have been under attack from the Left for their reform and liberalisation programmes, and that has badly hindered the functioning of the government.

Fear of the anti-reform stance of the Left has made the ruling Congress and Nationalist Congress parties excessively nervous about pushing the reform agenda. Since the coalition has depended on Left support this was inevitable. But reforms are needed to unshackle the Indian economy and put it firmly on the path to more rapid growth.

There is a mistaken perception that reforms and liberalisation are bad planks on which to go to the public before an election. That can and should change.

The latest budget allows the coalition partners to approach the electorate with this proposition: all these benefits to farmers, the poor and the middle class have been made possible because of the success of reform and liberalisation.

Having tabled a populist budget before parliament, evidently because elections are not far away, the government should now launch an information campaign explaining how a strong economy created by economic reforms gave it the power to distribute benefits to the public. There will not be a more appropriate time to talk about reforms than this.

The taste of reform
People can actually experience the benefits of reform. Income tax cuts here, excise duties cut there, loan waivers elsewhere, more allocations for rural development … More expenditure has been committed to health and education, infrastructure (highways, power and integrated rural and urban infrastructure). And, barring a few sectors, such as IT and ITES, industry is happy too!

And it's not just talk. The growth of the economy has meant a rapid improvement in the incomes of a large number of people, except perhaps the poorest of the poor while inflation has been by and large under control.

The last five years have witnessed more economic improvement than ever before. The annual average rate of growth of per capita income has accelerated sharply, doubling to an average of 7.2 per cent per annum between 2003-04 and 2007-08, from 3.1 per cent between 1980-81 and 1991-92 and 3.7 per cent between 1992-93 and 2002-03. This, as the Economic Survey points out, "means that average income would now double in a decade, well within one generation, instead of after a generation (two decades)".

That is why, the popular measures of raising the income tax exemption limit and adjusting the rate slabs (making a large number of people, including the young, very happy) are not worrisome. As Gokarn points out, "The revenue impact will be offset in just a few years as rapidly rising incomes take these people into either the first tax bracket or higher ones in short order."

Why is it important to tom-tom the benefits of reform?
If growth should be maintained at its current level, and even stepped up, reforms must be continued. This applies to social sectors such as education, health, housing for the poor and food distribution (which affect the masses directly) as to the modern industrial and services sectors (which distribute benefits indirectly through the percolation effect).

The government cannot win the confidence of the populace unless it ensures that funds allocated for the poor actually reach the poor, that education is not trammelled by the bureaucracy, that healthcare spending actually results in better health for the poor and middle classes, that the multiplier effects that good public works (including road and rural infrastructure building) should create actually materialise instead of being negated by politicians and contractors colluding to pocket the funds.

These things cannot be done without reform - and reforms at the state level as much as at the Centre. And that needs the support of the masses. The people should be made to see the reformers as those who seek to deliver them from corruption, theft and injustice. The opponents of reform should be seen as anti-people, not the reformists.

Corruption is not the only big burden on the public. An inefficient and loss-making public sector is a burden because the ordinary people have to shell out more taxes to support the wastage in the public sector. The money to pay for a hugely bloated and still-growing bureaucracy is extracted from the pockets of the poor and middle classes. Why should the government be so timorous about advocating privatisation?

Given the latest budget's commitment of wide-ranging benefits to nearly the entire population, now is the best time to propagate the case for reforms. As the party that initiated economic reforms in 1991, the Congress can harvest the goodwill of the people if it champions the cause of reforms instead of trying to be defensive and unenthusiastic.

If the ruling coalition seizes this opportunity to link economic reforms and fiscal benefits, it will actually improve its chances in the next elections. It will also become less dependent on support from the Left parties to lay a claim to being pro-people - and be able to implement programmes that are genuinely pro-people.

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Budget populism, nuclear deal, elections and reform