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Choosing Expediency Over Principle

“This Budget belongs to ‘Aam Aadmi’. It belongs to the farmer, the agriculturist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest. I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming years.”

With these words, the Finance Minister concluded the much-ballyhooed budget speech, which my fellow panelist Mahesh Murthy believes doesn’t matter any more.

While there are plenty of schemes and sops for farmer and agriculturists – over $25 billion, about 10% of the budget, has been allocated to various schemes for rural development – there’s not much that is enthusing for entrepreneurs and investors. In his second budget after a conclusive election victory, the Minister has continued to reward his party’s core constituency and vote bank, not necessarily in ways that would actually empower or ameliorate them.

The Minister said that disinvestment would allow people to participate in the profits of public sector companies. What he fails to recognize, or chooses not to believe, is that the current program of disinvestment is a misnomer – “monetization” would be a more accurate characterization. The government proposed to sell minority stakes in public sector units to pay for the social sector schemes believed to help the bottom of the pyramid. Privatization and strategic sale of government-owned companies is what is actually beneficial to the economy.

Loosening government-control over companies results in more efficient management and lower prices for consumers, also freeing up capital for investment in critical areas such as infrastructure. India doesn’t need to borrow money from the World Bank to build roads. The raison d’être for disinvestment is change in management control, which the Minister is not achieving by monetizing minority stakes.

There are no bold pronouncements and no liberalization. Mahesh is right when he says that in recent years budgets have been predictable and populist. Admittedly, this budget too is rather stale and devoid of vision.

I don’t think we should be content with a GDP growth rate of 7% or 9%. Our true potential is at 12%-plus, for two reasons – India’s GDP stands at about $1.2 trillion and we are starting from a low base. Secondly, India’s demographic profile is also very amenable to support high-growth rates. But the specter of government-control and short-sighted and politically-driven policy making year after year is holding the country back. We saw glimpses of what is achievable when we had truly reformist and visionary Prime Ministers P.V. Narasimha Rao and Atal Bihari Vajpayee guiding policy-making. They were supported ably by cabinet ministers like Manmohan Singh, Yashwant Sinha and Arun Shourie. Without those years of breakthrough liberalization, nobody would ever think of classifying India as a world-power, and we’ve just scratched the surface.

But this year’s budget did have some silver linings. I wrote earlier that India’s “offline” market has huge potential, and some of the budget announcements are bound to make the offline market even more attractive.

The Minister reduced personal income taxes, leaving more money in the pockets of consumers. He also spoke about (finally) allowing foreign direct investment in the retail industry. This can be transformational for the sector. The Indian consumption story looks very strong.

One of the major new announcements was charging a cess of Rs. 50 per ton of coal. India’s coal consumption, of both domestic and imported coal is over 600 million tons. The Rs 3000 crore ($600 million) revenue from the coal cess is proposed to be invested in a National Clean Energy Fund. The initiative should give a boost to clean technology in India, and while the purpose and goal of the Fund is still unclear, care should to be taken that the government doesn’t take on the role of kingmaker in clean technology.

I share Mahesh’s concern about how India risks turning towards oligarchic and crony capitalism, where special interests and members of the lucky sperm club are the only ones who get to participate in economic opportunity. The way to tackle that is through meaningful reforms and more liberalization.

Perhaps entrepreneurs and believers in individual freedom and the market system should organize themselves better, and then we can expect politicians to listen to the collective voice. Paul wrote yesterday that people might wonder if they should pay more attention to Nitin Gadkari, head of the main Opposition party BJP, if the government went too far on populism yet again. Mr. Gadkari has spoken out clearly in favour of free enterprise, but his party discredited itself by staging a walk-out in the middle of the Finance Minister’s speech.

In sum, Pranab Mukherjee could have delivered more, and the few features that stand out in this budget are mere consolation prizes. The Congress has the electoral mandate, but doesn’t have the political will. Once again, it chose expediency over principle. Another year has been lost, and we continue to be in the dark.

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