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VIEWPOINT: POLITICALLY CORRECT
Mr Sinha's Big Gamble
The budget contains risks that could
make its implementation run into heavy weather.
By P. Chidambaram
 When
Budget 2001 presented by Finance Minister Yashwant Sinha was compared
to Budget 1997 (the so-called Dream Budget), I felt a strange mix of sadness
and happiness. Happiness, because in many ways I was pleased with the
budget. If you will recall the wish list that I had published ("Carry
on Reforms", February 5), I had included 10 items, and of the 10,
the finance minister has delivered on eight. The budget signals a return
to the path of reform. As far as Sinha is concerned, after the disappointment
of Budget 2000, it is a case of the return of the prodigal. When I described
him as such, he did not protest!
My sadness is because the budget contains political
and other risks, and its implementation could run into heavy weather.
But it will not fail in the sense that some doomsday prophets would like
it to unravel and be condemned as a "failure". Budget 1997 also
did not fail as some commentators think and write.
Despite the withdrawal of support to the H.D.
Deve Gowda government exactly 30 days after the budget was presented,
culminating in its fall, and despite the East-Asian crisis which devastated
Indian industry, 1997-98 witnessed a 5 per cent growth in gross domestic
product (GDP). What commentators forget is that the growth was restricted
to 5 per cent because in that year the agriculture and allied sector registered
a negative growth of 2.4 per cent. That cost the country 0.8 per cent
in terms of real GDP growth. If agricultural growth had even remained
flat at zero per cent, GDP growth in 1997-98 would have been 5.8 per cent.
 The
same thing could happen to Sinha's budget. The agriculture sector has
registered low growth rates of 0.7 per cent and 0.9 per cent respectively
in 1999-2000 and 2000-2001. Sinha has included a good package for agriculture,
but it is not adequate. In 2000-2001, budgeted expenditure under agriculture
and rural development was not fully spent. There was a shortfall of Rs
399 crore and Rs 492 crore respectively, and similar shortfalls could
occur in the next fiscal too. Besides, under the Accelerated Irrigation
Benefit Programme there is an increase only from Rs 1,712 crore to Rs
2,000 crore. No other innovative programme has been announced. NABARD
funding for the RIDF has been increased moderately from Rs 4,500 crore
to Rs 5,000 crore. Hence, if agricultural growth does not pick up sharply
to 2 or 3 per cent, Sinha would have to be content with a modest GDP growth.
The other risks in the budget are inflation
and investment, particularly foreign direct investment (FDI). The budget
does not contain a strategy to fight inflation. Inflation has remained
at over 8 per cent for several weeks now, and with the reduction of the
bank rate, at least one instrument to control inflationary expectations
is not available for the time being. Moreover, if inflation continues
to remain high, the case for reducing interest rates will weaken significantly,
and discontent among household savers, pensioners and government servants
will escalate, putting Sinha's overall strategy in jeopardy. The budget
also seems to care little for FDI. Without a sharp rise in inflows of
FDI, there is little chance of the investment/GDP ratio going beyond 23
per cent. I am sceptical of the primary market and the volatility in the
post-budget days has only deepened my scepticism. If all these downsides-high
inflation, sluggish primary market and modest inflows of FDI-take an ugly
turn they will have an adverse impact on growth.
The budget assumes nominal GDP growth of about
12.7 per cent. Revenue Secretary S. Narayan has also confirmed this. Nothing
wrong with that, but the crucial question is how does this figure of 12.7
per cent break up into real GDP growth and inflation. According to Narayan,
inflation is likely to be 6.5 per cent. Hence, real GDP growth will only
be 6.2 per cent. My assessment of the budget is that, all other things
being equal, it promises a GDP growth of between 6.5 and 7 per cent. The
potential of the Indian economy to achieve a growth of 9 per cent and
beyond has not been tapped.
The other political risks of the budget are
disinvestment and the labour package, but these two subjects deserve separate
and more elaborate treatment. For the present, I only wish the Government
is able to summon both courage and wisdom to implement its proposals.
A budget is only a statement of intention. Its
success or failure depends on many things, often unpredictable. In the
last decade, we have noticed that political instability and uneven distribution
of rainfall are the two factors which have the most damaging effect upon
overall economic growth. At the moment, we can only rate the budget based
on intention. Sinha's intentions are good. His assumptions are basically
sound. The steps he has outlined are reasonable and credible. For the
sake of the country, we should offer him our best wishes once again to
deliver on his budget.
(The author is a former Indian finance minister
and a TMC leader.)
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