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Rediff.com  » Business » Budget 2012: Rearranging the chairs on the Titanic deck

Budget 2012: Rearranging the chairs on the Titanic deck

March 19, 2012 18:45 IST

The budget is evidence that we have no strategic plans to successfully compete in the evolving world. If this government were running a business, the board would fire it without a second thought, says Sonali Ranade

Budget-making in India can never be routine, though one hopes we will get to that Nirvana some day. The world is still in an unprecedented economic crisis. The United States has just come out of one of its deepest recessions. The EU has been barely able to keep its currency together. Its climb out of a recession could take longer. China next door has piled on 100 per cent of its gross domestic product as bank debt to keep its economy growing through the last three years. It needs to slow down to trim its huge internal debt. It will see a once-in-10-years regime change next year that has humongous implications for us. Peak oil, the crisis over Iran's nukes, oil sanctions, add to the sense of multiple challenges we face. Government response to these challenges is something that must find a reflection in its priorities and budgets.

At home the litany of problems we face are legion. There is a global crisis in food. Food prices have tripled over the last decade and will at least double again over the next five years. To an economy like India that is both a challenge to feed its billions and an opportunity to bring into play our vast reserves of unskilled labour and semi-arid lands. We produce virtually no oil while running one of the most oil intensive economies in the world. As oil prices trend towards their peak, and they could reach as much as $200 a barrel in the next three to five years, we need to figure out ways to adjust to them. 

Our population problem, never mind the glib talk about demographic dividends, is simply too high and growing too fast, in relation to critical resources such as fresh water and sustainable energy. Add to that, we have a thicket of internal constraints ranging from under-governance and dysfunctional politics, to the legacy of our socialist past that prevent us from truly earning our way in this world.

The idea that the Earth's resources are finite, and that we as a nation have to compete with others for them, has simply not registered either with our people or politicians. This competition for resources is no longer by war. In the modern world this competition is primarily through trade and economic competition. Simply put, if you wish to live well, you should produce something that others value. Instead we meander through life on the vague presumption that the world, like our own Mai-Bap-Sarkar, owes us a living. That is simply not true. 

As the world grows from 6.5 to nine billion people, we have to be able to compete economically with the rest of the world. In fact, we need excel it by a fair margin in order to better our living standards. Point is, we may not even be secure unless we are able to step up our economic act to provide for the money needed to protect ourselves and secure our access to critical resources. The competition is going to get fierce.

So as we look at the budget, keep the above broad resource picture in mind to assess if the government has a broad plan of action that will enhance our ability to compete successfully with others for markets and resources. The key to survival in this world, as any school student knows, is a. how well you compete with others that include friends and foes and b. how well you plug into the ecosystem of the world around you. That reality is no different for nations and its people. The effectiveness with which you enable your people and businesses to compete is the key to survival as a prosperous society. Anything else is really irrelevant. How does the budget address the task of making us competitive in the emerging world?

Obviously, the budget cannot address all the problems at one go. They have to be addressed one by one. To illustrate why the budget is not part of a cohesive and cogent plan let us us take a look at just two or three emerging problems --  food and oil and infrastructure -- because they represent a threat that can be converted into an opportunity.

A UN report projects food prices will at least double over the next five years after having tripled over the last 10 years.  The reasons are demographic and emerging resource constraints of arable land and fresh water. The crunch is worldwide. We have three things going for us. Vast reservoir of rural labour, vast tracts of sparsely rain-fed land that is not currently used for cultivation, and a technology base to turn these semi-arable lands into viable farms for producing crops like corn (maize), soybean and other coarse grains that we no longer eat but are used abroad to feed livestock.  Putting together a plan for cultivation of such crops and their export to China, the world's largest importer of food, is not rocket science. We have the experience in soya. What is required is elimination of dysfunctional rules and laws --  land ownership, land acquisition for farming in the corporate sector, lease of land, farmer shareholding in agro-corporations -- that enable these businesses to come up. 

One is not asking for subsidies, technical knowhow, easy loans -- nothing. Just the minimum legal and regulatory framework required for enabling these businesses needs to be put in place. All capital and investment can come from the private sector. Mark this does not requite funds from the budget. It only requires intellectual and political capital.  Intellectual capital is required to see how the existing rules can accommodate the new business model and political capital to sell the scheme to farmers. With minimal budgetary support government can a. spur agriculture development in semi-arid areas and b. cut down the need for doles to rural poor. 

Now look at the budget to see what it indicates in this strategic area.  It is zilch.

Let us get to oil. We import 75 pc of our oil needs. This isn't going to change. Over the last 10 years oil has moved from $40 to $100 and in the next 10 years, if not earlier, it will hit $200 even if shale gas proves out. Clearly two things are necessary: We have to cut down the need to for oil by looking at alternatives; and where oil use is inevitable, the efficiency with which we use it must improve. What do you see instead? 

Firstly, the government doesn't recover the full cost of imported oil from consumers and instead begs, borrows and steals, to subsidise its price. That actually promotes inefficiency and distorts everything from the cost of private versus public transport to alternatives between oil-fired power generation and solar cells. Second, what's the government doing, say, in solar energy? Look at China next door. Faced with the same problem China has poured billions of government money to promote research and development in solar panels. Five years later they have the world's cheapest solar cells and at prices where the power generated can compete with gas-fired power plants, though not coal. 

Everywhere such strategic investment is driven by the government and then exploited by the private sector. We reverse the process here. The government wants the private sector to pour research dollars into such things as solar panels, and if something does fructify it will be there with a whole regulatory framework to siphon off the profits in the name of preventing profiteering. How can local businesses compete with those from China? Does the budget offer anything to say the government is alive to this vital structural problem?

Whether it is FDI in retail, which is nothing but stimulating more completion in the wholesale distribution system to break cartels, or reforms needed in, say, the transportation system, the same lack of strategic thinking manifests itself. Let us just take an example of out of the box thinking -- say, in infrastructure like roads, ports and power plants.

We need massive investments in infrastructure. And the Chinese need massive export orders as their local business dries up and exports to the US and the EU drop. The Chinese have $3 trillion of reserves, which they are desperate to spend just to preserve their real value. What prevents us from drawing up a plan to invite Chinese investment in our roads, railways and ports? We burn with resentment as the Chinese build roads, railways and ports in our neighbouring countries, all the while whining about encirclement and the like. Chinese firms are as much driven by profits as any other. Their billionaires control the Chinese politicians in much the same way as our tycoons control ours. The Chinese would be happy to build the infrastructure for us and we should be smart enough to invite them to. What if there is a war? Well, in a war the Chinese can't carry away our roads, or railway lines or ports nor will we let them shut down power plants. In fact, the best way to prevent war is to hug China tightly in a strategic clasp where they can't think of a war. 

Be that as it may, the point is, are we thinking? Is the government thinking?  Do we see those plans in the budget?

The budget is evidence that we have no strategic plans to successfully compete in the evolving world. If this government were running a business, the board would fire it without a second thought. This lack of a holistic strategy, and the effort to sell the strategy as absolutely necessary reforms, is disconcerting. The budget looks like the government is busy rearranging the chairs on the Titanic deck as our Ship of State hurtles towards a certain wreck against icebergs that we all can see.

Sonali Ranade