One afternoon recently, Ambika Soni, minister of information and broadcasting in the UPA government, stepped up to a roomful of journalists and announced one of the most important policy reforms in several years. Two surprising things happened that day. First, the government decided to take on the subject of India’s warped fertilizer pricing system head on after decades.
Even more surprising was that this vital change in rules had been announced just eight days before the Budget, without waiting for it to be bundled into the finance minister’s speech, unthinkable a few years ago. Then, President Pratibha Patil opened Parliament, four days before the Budget airing her (and the government’s) worries about spiraling food prices. She said the administration would soon make into law an Act to supply cheap food to the poor.
With policy announcements coming from every direction before the Budget, will the finance minister’s morning speech in Parliament lose its glitter as India’s biggest policy event? Stripped of fancy policy embellishments, will the Budget, broadcast live to millions of viewers and commented on by punter and pundit alike, turn into a dry statement of government accounts?
“I’ve always found Budgets boring, apart from when there’s an economic crisis in the country or when there’s a genuine push for reforms,” says Ashok Desai, chief economic adviser to finance minister Manmohan Singh during the mould-breaking years of 1991-93. Those were the years when, many believe, India enacted some of its boldest economic reforms.
At five in the evening in July 1991, Singh stood up in Parliament to deliver his first Budget speech, opening India’s economy to the rest of the world. He finished with Victor Hugo’s “an idea whose time has come” analogy for India, and added these prescient words: “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”
“To my mind, the first two or three Budgets of Singh were the most memorable,” says industrialist Rahul Bajaj, chairman of Bajaj Auto. But memory can play tricks on us. While most people remember Manmohan Singh’s first few pathbreaking Budgets, not many remember what happened at 11 AM of the same morning in July, 1991, when journalists turned up for a routine press conference to be addressed by the industry minister.
What happened thereafter was anything but routine. The media gaped when Prime Minister Narasimha Rao, acting as industry minister, announced to the world that he was scrapping India’s notorious system of industrial licensing. Production and capacity shackles that bound industry down were scrapped in that instant, Byzantine procedures called the ‘licence permit raj’ that led to harassment and bred corruption were done away with. The M in the MRTP Act was as good as dropped.
Rao’s announcements were probably the single most important reforms event in the last 20 years. Even then, few remember it today, scouring only the Budget landscape for reform milestones. That could be a mistake. There’s a reason why policy announcements are drifting away from a once-a-year Budget to many platforms.
“It’s bound to happen in coalition politics,” says Pronab Sen, the chief statistician of the government. “You should expect more and more policy changes to be announced outside the Budget, in Cabinet briefings or in the speeches of the President.”
To see what Sen means, remember that ministries like telecom, aviation and food and agriculture are controlled by parties like Tamil Nadu’s DMK and Maharashtra’s Nationalist Congress Party, allies of the Congress. These ministers, erratic sponsors of reform, respond to the whims of their own party bosses, twisting and turning every which way to maintain their grip in an overwhelmingly Congress system.
In such a system, it’s better to thrash out mood swings and differences in closed door Cabinet meetings and announce things immediately afterwards, rather than wait for a Congress finance minister to bask in all the glory during the Budget.
“It makes great sense in a coalition environment to have the President announce the big policy imperatives,” says Sen. Over the last decade or so, the President’s role has come to be appreciated as increasingly apolitical and multi-partisan. Over the coming years, expect the broad-spectrum policy grandstanding of finance ministers on the last day of February to diminish.
Global perceptions about India have also changed. Unlike the fiscal panic of the 1990s when India, battered first, by its own problems and later, by the Asian crisis and Russia’s default, always had to answer for deficits and growth, it today looks like a beacon in the darkness of Western economic gloom.
Today, the West imagines that India can sail unconcerned on the tides of growth, unfettered by government spending or deficits. Suddenly, Wall Street, which has seen its own walls crashing around its ears, is willing to look away from loose fiscal policies in the East.
“The West has gone through a meltdown and European economies are taking a tremendous beating, but the view from New York about big emerging markets like India hasn’t changed much,” says a fund manager of one of the world’s largest investment banks, who manages vast sums of money in emerging markets.
“Look, when you see things from Wall Street, which has gone through a near-death experience, you see the West in a deep fiscal hole. In the West, government budgets, stimulus packages and so on matter a lot. Obama and (treasury secretary) Tim Geithner are way more important than (Federal Reserve Bank) Ben Bernanke. Today government budgets are the lifelines for these economies.’
‘But when these guys look at India and China, they don’t see a crisis. They see a growth story. India, what’s to worry about? A dip to 6% and a recovery to 8%-plus growth? So why should India’s budget matter? It could be wrong, but that’s what it looks like from New York,” he explains.
“After Singh’s Budgets, most others were boring. Yashwant Sinha was a pedestrian finance minister and was portrayed as such by the media, but he tried to cut out of that mould and make his later Budgets interesting. And Chidambaram, his Budgets were feared. He’d make small changes that would become big irritants,” says Desai.
Desai suggests that like Yashwant Sinha’s later Budgets, finance ministers can weave oratory and romance with policy statements and tax rates to hold people spellbound. Can, or will, Pranab Mukherjee rise to the bait for the next four years? Chest thumping isn’t the style of Pranab-babu, intellectual workhorse for the Congress leadership who absorbs history and data like a sponge.
On any given day, Mukherjee can turn red-faced with indignation on people who question him on, say, the wisdom of reserving seats for women in elected posts, to remind them that Costa Rica did it first. And to drive the point home with the killer observation that Costa Rica has been the longest uninterrupted functioning democracy in the developing world, including India.
So over the next few Budgets will you switch off the TV and read the sports pages the day after? That could be a mistake. To see why, go back in time. Unadorned by Singh’s Victor Hugo references or his later penchant for Urdu shayris, nor Chidambaram’s quotes from the ancient Tamil poet Thiruvalluvar, India’s third prime minister, acting as finance minister after ousting Morarji Desai from the post, presented her first and only Budget in stark words.
“The marginal rates of income taxation will be increased progressively in all personal incomes above Rs 40,000 per year. With the addition of the surcharge at 10%, the maximum rate of 93.5% will now be reached in the slab over Rs 2 lakhs,” said Indira Gandhi on the last day of February in 1970.
Weeks before, she’d nationalized 14 banks; more takeovers of insurers, mines and so on would follow. She abolished the huge, taxpayer-funded incomes that Indian princelings were guaranteed after Independence. Hemmed in by enemies in the party and outside it, an imploding economy and with the threat of imminent war with Pakistan, this was the best that Indira could do. It bred a cult where every Hindi movie would have a good hearted smuggler squaring off against a ruthless compatriot.
Thankfully things aren’t as whimsical as that anymore. Finance ministers know they work in a global economy where everything is connected. Over the last decade or so, India has developed a relatively stable tax structure which has bred confidence among investors and businessmen. The Budget generates interest when the least stable parts of the tax structure – customs and excise duties, surcharges and cesses, are tweaked.
“Every time during the Budget speech when the finance minister comes to the part that deals with tax changes, I see everybody in the House crane over, listen more carefully. After all, that’s what everybody’s waiting for, tax changes can affect anyone’s life,” says Rahul Bajaj who’s also a member of the Rajya Sabha.
“Even if excise duties do go up over time, I wouldn’t worry too much, because it’ll help narrow the deficit. I hope the government reaches a relatively low deficit level as soon as possible,” adds Bajaj.
“Over the next three to four years, Budgets will become more important than the last eight to nine years,” says Abheek Barua, chief economist, HDFC Bank. “The hard economics of the Budget will become very critical. In any case there are some things in the Budget that you need to look forward to: spending on education, health, irrigation. And now it’ll become more interesting as the government tries to pare its deficit without hurting growth.”
Across the globe the days of low inflation, low interest rates and low government deficits, massaged by central bankers like Alan Greenspan, are over. Growth is no longer a given, but subject to hard policy decisions. “Fiscal policy is once again fashionable in the West and in India, Budgets will reflect that trend,” says Barua.
And indeed that was the consensus when the heads of 10 global central banks met at the RBI’s Mint Street office recently. They were reconciled to the fact that bankers wouldn’t take the front rows in the theatre of policymaking, but finance ministers with their budgets, taxes and deficits.
“There’s a lesson in what the world has gone through in the last two years,” says Sen, “Hard policy that deals with taxes and deficits can’t be neutered, as it was over the last 20 years all over the world. Central banks need to change their mind: they’re not paid just to keep inflation in check, they have a bigger role, to boost employment. Budgets will become more important. Sure, strip Budgets of policy adornments, but make them carry strong fiscal policy statements.”
“Keynes is back,” he adds.
Indeed he is. A book, by Lord Skidelsky, John Maynard Keynes’ greatest biographer, titled ‘Keynes: The Return of the Master,’ (shades of Tolkien’s final Rings book, ‘The Return of the King’) is a bestseller. Governments across the world have again rediscovered Keynes, mathematician, philosopher, punter, bureaucrat and prophet of revival after the Great Depression.
Now that Keynes is back in fashion, as he was for nearly 40 years till the late 1970s, government budgets with hard accounting for where the money goes, whence it comes, and how it’s spent, inevitably become important. Less glamorous perhaps, but important nonetheless.
