Indian Budget 2009

The studio was full. Analysts came dressed up for the budget, in their three-piece suits. Industrialists came with a list full of demands, sops...more sops, tax cuts, more tax cuts. Then there were economists with a list of reforms, more reforms. I was feeling lonely…watching from the sidelines. The budget speech was little more than an hour but the drama continued long after. Why wouldn't it? After all it had begun 3 months ago when the Sensex did a pole vault of 2110 points in a single day. There was talk of a new India. A new secular bull run.
It's 4:00 PM now. 'We' are down by 869 points. Markets have given a thumbs down to the budget. Traders with long positions have got long faces. TV channels are busy asking 'experts' questions on how they rate the budget on a scale of one to ten.

Why this expectation? How much can change in one quarter? You didn't even have a government change. It's the same Congress. It's the same finance minister. I'm not buying the sentiment that there is anything fundamentally wrong with this budget. There is no reason to be disappointed. The expectations were wrong. There are no quick fixes to the structural economic issues that we face today. If the government is expected to stimulate the economy back to the growth track, it's going to have a deficit. You can't expect the government to embrace austerity and profligacy at the same time. You can't expect the government to sell strategic stakes in the PSUs to meet the fiscal deficit. If buy and hold is a good strategy for investors, the government would be foolish to sell just because its finances are strained. I agree that the government has no business to be in business but given that the government is already in business, that too in a big way, it shouldn't sell stakes at fire sale prices.

Those who ask for oil price decontrol should think what they are asking for. From January 2004, it took crude oil less than 4.5 years to move from 30$ to 150$ a barrel and it was back at 30$ at the end of last year. It's gone back to the 60$-70$ range. Are we ready to take such volatility in our stride? No, we aren't. But we, as a nation, are already paying the cost for all the subsidies that we get. We are in fact paying more than the cost of subsidies because the user group that benefits from subsidies is different from those who pay for the subsidies and such a system is bound to be inefficient. The government has to reduce subsidies but in such a manner that it doesn't spark a violent over-reaction. In a democracy, such a reaction can lead to the rise of populist parties that can reverse the course of reforms. I'm happy that the finance minister has acknowledged the need to reduce subsidies, need to decontrol oil prices and the need to disinvest. What he has not done is to make promises that can make good headlines but can't get implemented. Haven't we seen in the past, how loft disinvestment targets were forgotten soon after the budget?

When someone is making promises for the sake of doing so, he needs no time. The fact that the government sought more time on various reforms, sounded more sincere to me than any 'dream budget' would have. I sincerely hope that the government gives serious thought to various reform measures that are long overdue and takes an action that doesn't need to be rolled back or held in abeyance due to protest from stakeholders whose short term interests get affected. We don't want to hear the Finance Ministry announcing something and then, he ministry which has to implement the reform requesting a rollback. The government must reach to a decision on issues of vital economic importance and then act decisively on those.

The finance minister did well by not raising taxes and by sticking to the date of implementation of GST. He did well to abolish the FBT and 10% surcharge on income tax. I'm happy that he increased the MAT to 15%. There is no reason why tax sops to some favored industries should continue for decades at the expense of other industries. Such tax sops, although important for nascent industries, tend to cause oversupply in mature industries like IT.

The dream of going back to the 9% growth level and maintaining it there is unrealistic unless we remove constraints. We need to go full throttle on providing easy capital, infrastructure and skilled manpower. These are the areas where there would be no political opposition. I was disappointed that the budget didn't contain enough provisions on these aspects. All the measures announced in this budget are welcome but we need more. The foreign direct investment is a welcome source of capital. We need to get rid of sectoral constraints on this. The physical infrastructure and skilled manpower take time to build. We need to take radical steps in these areas.

The thrust on rural development and poverty alleviation is good. We cannot afford to raise the income inequality any further. The political unrest, consequent disruption of economic activity and breakdown of law and order in poverty stricken areas are the factors that convince me that it is impossible for a democratic country to grow at a fast pace in the long term unless it sets all sections of population on the growth path. To that end the talk of increasing the efficiency of delivery mechanisms of subsidies is welcome. If we can plug in the loopholes, the money going from the government to the poor will boost the demand in the real economy. The money that is lost to corruption ends up in a parallel economy of back money which reduces the multiplier effects of public investments.

There were certain things in the budget which create genuine fear in the mind of anyone who likes to see more reforms. The praise for Indira Gandhi's nationalization of banks was uncalled for. The talk of government planning to retain 51% stake in PSUs is a sure shot way to fritter away public wealth. As a general case, the divestments should be to a strategic partner who brings in expertise to run the business well. The government must let go of control. If the government sells 25% to the public and retains control, then (a) It will fetch a lower price for its stake, (b) It will not improve the business (c) and it will be cheating those 25% minority shareholders by imposing its will on them (imagine the pain of shareholders of HPCL, BPCL and the like)

Overall, there are things in the budget to raise hope for higher growth in the long term. The key lies in implementation of the plans. The high disappointment levels of the market participants are as irrational as their hopes of one-night reforms were. You can shrug it off.

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