Budgetary Retreat in Delhi

From John Elliott's blog, Riding the Elephant - http://ridingtheelephant.wordpress.com/

When Sonia Gandhi, India's Congress Party president and leader of the ruling United Progressive Alliance (UPA) government, praised the country's 1969 bank nationalization at a conference in New Delhi last November, there were gasps of surprise and horror from businessmen in her audience.

Now the same remark has been made by Pranab Mukherjee, the finance minister (right), in his Budget speech but, by the time I am writing this post (four hours after the speech ended) I have not heard any murmurs of horror from commentators on television programs.

Maybe that is because this is what one should expect from the 73-year old minister who, I remember, gave me a distinctly frosty and uninspiring interview when I first arrived in India as the FT correspondent in 1983 and he was serving his first term as finance minister.

Mukherjee has no track record as an economic reformer, and his budtet speech does nothing to show that he is one. But he is the government's most able political tactician, so one would expect him to at least balance the politics, the books and the personalities, even if he couldn't rise to the occasion with a reform agenda for India's new government in the way that his predecessor, Palaniappan Chidambaram, would have done.

Mukherjee has done the politics by looking after farmers with loan concessions, plus more help for the rural poor and other social and infrastructure spending, and he has also handled the personalities (Sonia Gandhi, daughter-in-law of Indira Gandhi who nationalized the banks, was sitting next to him in parliament).

But he hasn't balanced the books, which is probably why the stock markets have fallen sharply, and why no one has so far found it very easy to say whether it was a really good or really bad budget. The government's total expenditure has been increased by 36 percent (including defense by about the same proportion and highway building by 23 percen). And the central government's forecast fiscal deficit (excluding the states' individual deficits) is up substantially at 6.8 percent of GDP, compared with 3.2 percent in 2007-08, because of measures taken to fend off the international economic crisis.

Both the 36 percent increase and 6.8 percent deficit are seen by many experts as too high, especially when there is no guide as to how Mukherjee expects to bring down the deficit, apart from aiming to get the country back to 9 percent economic growth from its current 6-7 percent. There has also been dismay that he is relying on government expenditure to boost the economy, rather than providing more of a stimulus for the private sector.

Mukherjee also said virtually nothing on divesting minority stakes in public sector companies, and only put a target of Rs11 billion ($240m) on what might be raised by 2010. Here he was being sensible because I don't think any Indian finance minister has ever reached his dis-investment target, and Mukherjee knows that it is a highly controversial program and he might only be able to sell off 10 percent stakes in two or three corporations by the end of next year.

But it's worth quoting what he said because it shows the basic strongly mixed-economy approach – not only his, but also that of Manmohan Singh, the prime minister who has never been a keen public sector reformer, and Sonia Gandhi, with her soft leftward-leaning liberalism. He said:

"The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 percent government equity in our enterprises, I propose to encourage people's participation in our disinvestment program. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive."

And on Indira Gandhi's bank nationalization he said (ignoring the fact that Gandhi did it more for short-term political than long-term socio-economic reasons):

"Never before has Indira Gandhi's bold decision to nationalize our banking system exactly 40 years ago – on 14th of July, 1969 – appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector."

The fault here of course is that he seemed to be closing the door on urgently need financial sector reform, and said nothing about the need to make public sector businesses more efficient, shedding surplus labor and management. Nor was there any discussion of the benefits (albeit very limited) of selling off public sector minority strakes – but that is par for the course because there is, as I have argued before, little real discussion of the pros and cons of policy in India.

One final omission – he said nothing on foreign direct investment (I have checked with a word search in the speech for those words and FDI), which might seem surprising. But it isn't because the government's FDI policy is a mess, thanks to Mukherjee endorsing changes introduced before the election by Kamal Nath, then industry minister, but opposed by Chidambaram. More on that soon.