Experts tell CNBC-TV18 that the FM's topmost priority right now should be restoring confidence in the way our economy is governed.
There is a long list of expectations and hopes from Pranab Mukherjee this Budget, but experts tell CNBC-TV18 that the topmost priority right now should be restoring confidence in the way our economy is governed.
“The more important task now is to restore confidence in India’s ability to do things,” said former Reserve Bank governor Dr Biman Jalan. Once the house is in order, Jalan says that other factors like growth will pick up.
For member, Planning Commission Arun Maira, there are two things which need to be implemented – project implementation and institutional change implementation. “Unless we can improve our implementation by implementing the institutional reforms and progress in our physical and infrastructure projects too, I am afraid the finance minister cannot produce the numbers,” he says.
On the other hand, Dr. Shankar Acharya of ICRIER says fiscal deficit is more important. “Any number below 5.5-6% this Budget will lack credibility,” he said.
Below is an edited transcript of his interview. Also watch the accompanying videos.
Q: How important do you think the Budget is going to be in terms of setting the growth tone and how worried are you about where the growth trajectory is moving for India?
Jalan: I don’t have to add anything to what you already know, which is that growth was high a couple of years ago and now it is dipping. The more important task now is to restore confidence in India’s ability to do things, which it is capable of doing, so it is a much larger issue that we are facing.
If you look at corruption, if you look at policy paralysis, if you look at governance issues, everyday there is some problem. Look at policymaking - we announce something, but we do something else. If you look at collective responsibility, everybody has a different voice. The principle of constitution is the Cabinet is collectively responsible, but you don’t have all that. So I think we are facing much more important issues.
With every Budget every year there is a lot of fanfare and lot of discussion like the one we are having, but I think today India is really at a crossroads, if I may put it slightly bluntly. When I look at India’s economy and economic fundamentals, it’s very hard to find something wrong. But if you look at the other side, which is the way we are doing things, then there is very hard to find something right.
So there is a disjuncture between economics and politics, which is what is keeping India low. About growth, whether it is 7.5% or 6.9% or 8.5%, it could be cyclical. Even if other things were right, we have ministers in jails, civil servants in jail and if you cannot rely on any announcement which is made by the minister in charge of that department, then what can you do.
Q: Is the Budget important in terms of what kind of impetus it provides to growth? Will it be an extremely growth-oriented Budget or does the current situation not lend itself to that kind of impetus from the Finance Minister?
Jalan: So far as the Budget is concerned, fiscal deficit is going to be there, expansionist and so on and so forth, but I don’t attach any importance to those matters. It may look like a sort of contradictory view or whatever, but the fact is that the job of the Budget is to restore confidence in the way we are running our economy. Growth per se is not a problem.
Look at our advantages - savings are high, entrepreneurial energies are high, demand is high and economic fundamentals are good. If you look foreign exchange reserves, oil prices go up, but it is not that you rush in as you would have 20 years ago. So everything is there for us to get it done and we did it for sometime, but something has happened.
So I hope the Budget will concentrate on those issues and once they are taken care of, once we put our house in order you will find the growth will happen, there is nothing that can stop it.
Q: Are you as optimistic about the growth outlook?
Acharya: No. I in one sense think I am a little more pessimistic than him, which is that I take very seriously the fact that growth has plummeted down to 6% in the Q3 of the financial year from levels of 9% plus two years ago. What’s more, I am worried that the aggregate rate of investment in the economy falling by 4% points of GDP, that is from about 33% of GDP to about 29% as estimated officially by the CSO for this current year.
In that circumstance, I don’t think it maybe that easy rekindle animal spirits to get investment up again; in theory it maybe there, but I think it’s going to be tough given all the considerations.
Also, I would say that the whole issue of fiscal deficit is very critical. After the experience of last year, where it’s gone from 4.6% to whatever number gets presented in the Budget, any number below 5.5-6% in the Budget will lack credibility in itself. The ministry had leeway in what it presents, but not a whole lot. Remember if each percentage of GDP is essentially like Rs 1 lakh crore, that’s Rs 1 lakh crore more of market borrowing, which impact on interest rates, crowding out and all of that. So I think fiscal correction is the minimum, some degree of fiscal correction, the minimum that people are looking forward in this Budget.
Q: What would your check box look like when you look at what he announces in terms of the fiscal deficit figure? The market is working with the basic assumption or the simplistic assumption that anything south of 5% is good news. Would you put faith in that or would you attach a degree of disbelief on it actually getting delivered?
Acharya: It’s not just about the number. Somewhere between 4.5% and 5%, is what I would be looking for, but that’s the least of it. The key is the credibility of the steps taken both on the revenue side and on the expenditure side getting there. If you get to that number by showing a very low amount of petroleum subsidies, it’s not credible. It wasn’t credible last time. I in fact said that last time and that’s not yet been paid by the way, so that’s a lack of credibility.
On the revenues side, if you don’t actually raise excise and service tax and a couple of other things, you could play with increasing the import duty on gold a bit. It may not achieve a whole lot, but it might. All these things, if I was sitting in the ministry I am sure I would be pedaling. You must have some greater credibility about the numbers or what lies behind the policy steps of those numbers in order to draw sustenance from the result. Otherwise it will just look like a table that looks nice.
Q: Capital expenditure is 1% of the total spends, it slipped to some 13% this year versus a 20% plus rate we have had in the past. How hopeful are you that infra will get the kind of impetus it needs at this point?
Maira: I like to pick up what Dr Jalan and Dr Shankar Acharya said that we seem to have lost something. It was a sort of spirit and we seem to have lost that. There is an institutional deterioration in the country and Dr Acharya mentioned about credibility. The number at the end of the day is produced by actions and if we don’t have any confidence at the actions that will be taken you can put whatever number you like out there, we don’t believe it will happen.
What people and investors are looking for is confidence that things will happen, that are supposed to happen, that you say will happen and if they are not going to happen then I am just keeping my money here or putting it somewhere else till you prove that you deserve my investments and my confidence in yourself.
When you talk of reforms, there are a set of reforms which have to do with things in the Budget or which a finance minister can do, but there are a whole host of other reforms which have nothing to do with the finance minister necessarily but to do with broader government.
Coming from the private sector I am reminded of my years and years and years of CFOs saying - guys there is this much magic I can do, you guys have got to perform, otherwise I can’t produce the numbers. So, we do give a lot of importance to the Budget. It’s the finance minister’s occasion, but there are only that many levers that a finance minister can pull. There are lots of other things need to be done regarding implementation, implementation and implementation.
I would divide implementation into two agendas. One is a very obvious one, is the project implementation. Our projects don’t get done on time and the other is institutional change implementation. We know what has to be done, but we are not doing it. Unless we can improve our implementation by implementing the institutional reforms and progress in our physical and infrastructure projects too, I am afraid the finance minister cannot produce the numbers.
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