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India's budget: Where will the money come from?

Published by The Straits Times, Singapore on 2004-07-10

NEW DELHI - Government budgets, like the US$105 billion one presented Thursday by Indian Finance Minister Palaniappan Chidambaram, aren't just financial documents that spell out how revenues are to be acquired and spent, especially in parliamentary democracies.

They are invariably an enunciation of the governing party's ideological agenda, political spreadsheets that must satisfy different domestic constituencies that may have differing expectations about allocations and subsidies. Yet, the central objective of a national budget is to spur economic growth and generate social development, particularly in a country of 1.1 billion people, more than 60 percent of whom live in rural regions. Some 57 years after independence, poverty and malnutrition are still widespread in rural and urban areas alike.

Mr Chidambaram had two additional challenges.

At a time when much-needed foreign direct investment (FDI) is barely US$3 billion annually because of international anxieties about India's relatively poor infrastructure, unwieldy bureaucracy and endemic corruption - and, one might add, about the durability of the 47-day-old government - his budget had to offer reassurance that economic liberalisation would continue. This was no mean task, given that the Congress-led United Progressive Alliance needs the parliamentary support of its Left allies in order to continue in office. India's Left - including the two communist parties - had been less than enthusiastic about inviting foreign capital in fields such as civil aviation, insurance and agro-business.

The other challenge was daunting as well. Mr Chidambaram, faced with a cumulative federal and state deficit of 10 percent of the gross domestic product of US$660 billion, needed to come up with enough money to reduce that deficit and also have funds left over for other national priorities. Rising deficits drive up borrowing costs and, in any case, the Finance Minister is bound by law to eliminate the deficit entirely in three years.

Given the short time that he had to prepare his budget, Mr Chidambaram came through reasonably well. The reaction in key financial centres such as New York, Frankfurt and London was generally positive. That of India's Left was less so. Mumbai's equity traders were dismayed by the 0.15 percent tax that the Finance Minister levied on all trading. There's going to be considerably political calibrating of the budget in the days to come.

But the country's industrialists, on the whole, seemed to be pleased.

"This is a budget with a vision," said Mr N. Srinivasan, Director General of the influential Confederation of Indian Industries. "It calls for holistic growth, addressing the huge untapped market of 60 percent of the population, rural people, who have not benefited much from India's economic progress over these past few years. For a first budget, the government of Prime Minister Manmohan Singh has most certainly created a very good first impression. It is a budget that definitely says that economic reforms will continue."

In another interview with The Straits Times, Mr Sunil Bharti Mittal, Chairman and Group Managing Director of Bharti Enterprises, said he was delighted with Mr Chidambaram. Mr Mittal, of course, had every reason to be, since the Finance Minister raised the ceiling for foreign investors from 49 percent to 74 percent in telecommunications, the sector in which Mr Mittal's company is a giant presence. (Singaporean investment to date in Bharti Enterprises is around US$800 million, almost half of the country's total FDI in India.)

And in still another interview, Mr Praful Patel, India's Minister for Civil Aviation, said he was pleased because his colleague, Mr Chidambaram, had increased the stake that foreign investors could take in civil aviation from 40 percent to 49 percent. Mr Patel disclosed this was particularly timely because he was about to launch a massive overhaul of India's airports and civil aviation industry. This, he said, was an effort to generate more international traffic and make cities like Mumbai, Delhi, Chennai and Kolkata into "hub cities" that fed tourist and business traffic not only to international destinations but also domestic ones.

But the nagging question of reducing India's annual deficit of some US$66 billion remains largely unresolved. New direct taxes are expected to yield about US$440 million; a new 2 percent surcharge on existing taxes that will be spent on promoting primary education, may yield another US$1.1 billion. Since nearly 40 percent of the country's annual revenues of US$ 60 billion from exports go into repayment of external debt - which is currently US$150 billion - and another US$17 billion goes into defence, where's the cash for the kind of social expenditures for rural and agrarian development that Mr. Chidambaram has proposed? (India's annual imports are US$51 billion, and the current foreign-exchange reserves are US$119 billion, but the government has repeatedly said that the trade surplus as well as reserves will not be tapped for domestic expenditures.)

Another question that can be posed is why Mr Chidambaram did not simply - and boldly - present a no-holds budget that declares India a free market and totally open economy. After all, the Congress Party's head, Mrs Sonia Gandhi, has become nothing short of the country's reigning deity. There's enormous good will for the UPA. There's high regard both for the Finance Minister and his boss, Prime Minister Singh. There's a strong sense that the Fabian socialism of yesteryears failed to alleviate poverty, creating instead a miasmic web of bureaucrats who perpetuated a "licence Raj" of permits and controls that nicely lined their pockets and those of their political chieftains.

The CII's Mr Srinivasan ventured one answer to this question yesterday (Friday): "In a democracy of our size, you have to carry various sorts of political opinions with you in order to build a consensus on economic policy. If you want sustainability of reforms, then you need as broad a consensus as possible. And in coalition politics - which is what we have now - this becomes so much more difficult. Therefore, there's a need for a protracted process of dialogue among people of all political hues and persuasions."

His assessment, as much as anything else, tidily sums up India's economic conundrum. It isn't simply a matter of Right versus the Left. Both ideologies need to co-exist in order to advance economic growth and social development. And while the country's masses and middle class are clearly impatient for faster progress, change doesn't come that speedily in a culture that dates back 5,000 years. But will foreign investors be willing show patience with India's disputatious political processes?

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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