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What the government can do with the Budget round the corner

Last updated on: February 2, 2011 13:56 IST

What govt can do with the Budget round the corner

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Subir Roy


It is scarcely believable that less than two years ago the Congress-led United Progressive Alliance triumphantly returned to power for a second term, rid of dependence on the Left.

That was a halter round its neck, holding it back on so many reform initiatives. Parting ways with the Left has indeed enabled action on one front, divestment, symbolised by the success of the large Coal India public issue.

This, plus the massive sums raised through the auction of spectrum for 3G services, has rendered invaluable support to the fisc, enabling the government to keep footing the bill for grassroots programmes like the one for employment guarantee.

But that's about all. With over three years more to go before having to face another general election, there is enough time for the government to take 'tough' decisions which can bear fruit before pre-election populism sets in.

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But the government seems inexplicably paralysed and in a state of dazed, directionless drift. Almost no initiative seems possible since some section or the other invariably opposes any move for change.

The spectre that haunts UPA-II is a Budget session in a shambles with the prospects of budgets having to be passed amidst pandemonium with zero discussion.

An Opposition led by the Bharatiya Janata Party, whose own stock across the country seems none too bright, is able to score on tactics (paralysing Parliament), thus highlighting the stunned political inaction of the ruling coalition.

This need not be so. Many of the current crises offer golden opportunities to take dramatic action with a powerful political content which can only do good, not just in the long but also in the medium term.

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Photographs: Reuters
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Take the shocking murder of Additional District Collector Yashwant Sonawane who was after the fuel black market mafia. Here is a chance to turn the tables and take the upper hand.

Declare a highly publicised war on the mafia -- raids, arrests and even a few operations that look suspiciously like fake encounters.

Not at all difficult, since there is a Congress-led government in power in Maharashtra, led by a new and supposedly upright chief minister.

After a few days, raise sharply kerosene and diesel prices, with the prime minister going on TV to tell the nation that the fuel subsidy is only fattening the mafia and corrupt local politicians and officials.

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Image: Finance Minister Pranab Mukherjee.
Photographs: Reuters
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He can also promise that the large sums recovered and more will be used for a food security programme which will offer the poor food at Rs 3 per kg or less.

We will finish the fuel mafia and remove hunger at one go, the prime minister can thunder out of the idiot-cum-soap box.

As currently envisaged, the programme, in its first stage will involve an additional expenditure of Rs 15,000 crore (Rs 150 billion) -- the subsidy paid to the oil marketing companies for the first nine months of the current financial year is Rs 21,000 crore (Rs 210 billion) and, according to one estimate, set to touch Rs 35,000 crore (Rs 350 billion) for the full year.

Over the next couple of years, the programme can be tailored to target it better and slowly shift to direct cash transfer, enabled by the issuing of unique identities, for buying grain from the market.

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The last will also reduce the loss incurred by the operations undertaken by the public distribution system or the Food Corporation of India.

This is not all. The three major ills currently clouding the economic horizon are inflation, driven in good part by food prices, a high current account deficit, excessive reliance on volatile portfolio investment and falling foreign direct investment.

A silver bullet of sorts is available to the government to address all these in one go. Ease restrictions on FDI in organised retail which will boost the overall FDI flows and a lot more.

Policy can be tuned with this move so that it results in an improved cold chain, better farm to fork logistics and reduced markup between the two prices. This will lead to a rise in farm incomes and create incentives to raise food output and rein in food inflation.

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All this will not happen in a day but in three years there will certainly be results which will address several constituencies: the aam janata at the bottom of the pyramid (enough food at affordable prices for all), the middle class (lower overall inflation) and economic agents or readers of business papers (reforms gaining momentum again).

Movement in this direction will have another beneficial effect -- it will improve investor perception of economic fundamentals and restore a degree of confidence in the stock markets, thus enabling a pickup in divestment.

This, plus maybe the continuing spectrum auction, will maintain the revenue buoyancy visible in the current year and allow the government to do more without calling a halt to fiscal correction.

Obvious candidates in areas where private investment is slow or non-existent will be rural roads, water harvesting and watershed management.

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Economics is all about priorities, selecting a few key areas for action -- not launching something as absurd as a 20-point programme -- acting decisively on them, waiting for the ripples to spread and eventually loop back, to set in motion a virtuous cycle.

The actions points are: ease bottlenecks, promote growth, reap higher revenues and with them conduct another round of tackling bottlenecks. Important as these measures are, it is idle to think that bold economic action alone will suffice.

The current sense that UPA-II is running to ground has been created foremost by the battering it is getting over corruption. Congress governments after a period in office are prone to sink under its weight.

That can only be tackled by political initiative, something which is also vital for better economic management.


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