Few documents affect more people than India’s government budget. Some of them are investors, dismayed by Finance Minister Pranab Mukherjee: his budget speech sank the Sensex index by 6 per cent. But while the budget does little to inspire, their alarm is overdone.
Observers huff about a budget deficit at 6.8 per cent of gross domestic product, more than double the 2.7 per cent of the 2007-08 fiscal year. But this is not a shock, nor much to get worked up about. The government was already in the red by 6.1 per cent of GDP in 2008-09 because of a fiscal stimulus it is now continuing. This is the right policy while global demand remains frail – and it is hardly excessive
In the longer term, of course, the government must keep the deficit under control and eventually stabilise and reduce its debt. Fiscal discipline is not India’s forte. The fiscal rules put in place in 2003 coincided with an improvement in public finances, but mostly because the boom obligingly boosted tax revenues. The government must now strengthen its commitment to reduce indebtedness and identify a plan for doing so. It need not be all that painful: as long as its growth rate stays high, India can grow its way out of debt faster than most.
Mr Mukherjee is therefore right that expanding the economy is the top priority. Growth clocked in at 6.7 per cent last year – respectable, but less than in previous years and not as impressive once population growth is taken into account.
To restore and maintain fast growth, India must press on with the reforms that have advanced its economy since the 1990s. But the Congress party is disappointing those who hoped it would capitalise on the recent landslide to divest from state-owned dinosaurs and make India more hospitable to foreign investment. Mr Mukherjee made disturbingly complimentary nods to statist policies of the past.
The budget does take a stab at important obstacles to India’s economic well-being. Increasing rural incomes and credit is a sensible way to support domestic demand and alleviate the poverty that mires much of India’s people. Improving the subcontinent’s infrastructure can boost growth. But until governance improves drastically, these policies risk the waste and abuse that mark much of Indian administration.
To be fair, beyond a proposal to rationalise taxes – which should be adopted – the budget is no tool for solving the governance problem. That does not, however, relieve the government of the duty to solve it.