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Budget: Jaitley must outline a reformist vision

July 08, 2014 15:07 IST

Budget: Jaitley must outline a reformist vision

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Mihir S Sharma

The finance minister must reverse the government's turn to statism, and lay out a reformist vision in the Budget, says Mihir S Sharma.

The last fortnight’s been dreadful for those of us who believe that securing India’s future requires comprehensive economic reform. One statement after another, one action after another has revealed that the new government doesn’t agree.

The National Democratic Alliance (NDA) is quick to act, unlike its predecessor. However – and this may be a radical thought – what a government does is perhaps even more important than its choice to do something instead of nothing. And it is increasingly clear that this government’s default economic choices are the wrong ones.

There’s only one way to correct this: in his Budget speech, Finance Minister Arun Jaitley must outline a reformist vision. And he should announce specific measures to implement it.

Here’s what the NDA has done so far, alliterated to fit in with Modi Sarkar’s preferences. And, for each crime, there’s a correction Mr Jaitley must announce.

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Return to the raid raj

The crime: food inflation is the biggest hurdle to economic recovery. Unless price increases are brought under control, the Reserve Bank of India won’t lower interest rates; without cheaper loans, an economic revival won’t be broad-based enough. 

Everyone knows that what we’re facing is a supply crisis. We need more investment in a cold chain, in dehydrating facilities for onions, in last-mile refrigerated storage facilities.

Allow people to keep and preserve stocks that let cities ride over short-term shocks in supplies from farms; empower the trader to invest — free the sector from political interference, or that of the local thug, and all this will happen by itself. 

Instead, there have been more raids on traders in Delhi over the past three weeks than in the three years before that.

The United Progressive Alliance (UPA) had slowly begun to take some commodities out of the draconian, statist Essential Commodities Act. This government has put potatoes and onions back in, meaning that it’s open season for raids and harassment. 

Meanwhile, has Modi Sarkar backed India’s farmers, and assured them of a solid market-based return? No. They’ve instead cut off access to export markets. Farmers will be faced with all the risk, but none of the returns from price volatility. What do you think the supply response will be? 

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To shift away from veggies, of course. And to rice or wheat. But worry not! According to Law Minister Ravi Shankar Prasad, briefing reporters on the Cabinet decision to increase the minimum support prices (MSPs) for rice and pulses: “I do not think a rise in MSP is directly linked to inflation.”

Righto, then. Incidentally, don’t buy any claims that MSP rises have been especially controlled: the purchase price of paddy has been increased only Rs 10 a quintal less than last time; that of moong dal,exactly as much as last time. 

The correction: Mr Jaitley needs to say that high prices are definitely not traders’ fault. He needs to say that the government understands how high MSPs can feed into inflation. And, as Dhiraj Nayyar has argued, the finance minister needs to promise Indian farmers what Manmohan Singh gave Indian industry two decades ago: an end to intervention in prices and quantities, especially export bans.

He needs to promise a more open land market in rural areas, which will help farmers find the optimal size of landholding — and let those who no longer want to farm turn their land into a bankable asset. 

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Strengthening the subsidy state

The crime: Consider, first, the suburban fare hike rollback. Local trains used to pay for themselves. They no longer do. The UPA had planned, from February, a sensible increase in commuter fare. This government ran away from it. 

Then there’s are petroleum subsidies. Last week, the petroleum ministry intervened to reverse the regular, quarterly revision in the price of domestic liquefied petroleum gas - that’s the LPG cylinder we use.

The price would have increased a measly Rs 5.5 a cylinder. Clearly, the Kelkar committee’s recommendation of a Rs 250 increase is not on the agenda.

Petroleum and Natural Gas Minister Dharmendra Pradhan told Business Standard: “Taking tough decisions does not mean burdening people with price hikes … Despite the burden on the government, we have not increased the prices of cooking gas and kerosene. Oil marketing companies have absorbed it. In the case of diesel, too, we have not passed the entire burden … to consumers. The government has absorbed this in view of public interest.”

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Mr Pradhan has pinned his hopes on the middle class “voluntarily” giving up the LPG subsidy for “nation-building”. This is, in my opinion, unlikely. 

Note both these rolled-back subsidies are not meant for the poor, but for the well-off. A World Bank study revealed that the poorest 27 per cent of Mumbai’s population receives only 15 per cent of local rail subsidies. 

Subsidised LPG cylinders are even more a middle-class preserve; only 28 per cent of India’s households use LPG cylinders, and benefit from the Rs 50,000-crore subsidy. 

OK, so perhaps there are other subsidies to cut? Why not the Rs 70,000-crore fertiliser subsidy? No chance. Here’s Fertilisers Minister Ananthkumar: “I want to assure farmers that there won’t be any increase in urea price. Besides, the government does not have any plans to cut fertiliser subsidy.” 

The correction: Mr Jaitley must say the government is committed to overhauling the subsidy state — which he can blame happily on the Congress, after all. To prove he means it, some staggered road- map to end the LPG and the fertiliser subsidy should be announced. In three years, they should be off the Centre’s books. 

This knee-jerk statism and populism should surprise nobody. The only people likely startled are those who convinced themselves that in Narendra Modi they were getting an intuitive reformer.

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This required them to magnificently ignore the many speeches in which Mr Modi promised to keep and raise subsidies, to avoid privatisation, to crack down on “hoarders”, and so on. We have got what he campaigned as: a hardline social conservative authoritarian, with a gift for administration and delegation. We haven’t got an economically liberal reformer.  

Which is why Finance Minister Arun Jaitley’s Budget speech is so important — above all as a message to his fellow ministers and powerful bureaucrats, as much as to citizens and investors. This government has a historic opportunity to carry out second-generation reforms; that will not be painless in the short term. 

Mr Jaitley must spell out an unequivocal reform road map. 

He must make it clear that a shared reformist vision underlies every decision the government takes. 

He must declare that some prices will go up - that it’s a crucial first step to a more efficient, productive and wealthier economy. 

He must say the government is confident that economic reform will help every Indian, and is dumping short-term political management of economic policy decisions. 

None of this “poor have the first call on resources”, garibi hatao redux stuff - not if it wants to distinguish itself from the Congress. As Swapan Dasgupta writes in The Times of India: “There is only a small window for being bold and establishing political distinctiveness.” 

For his government’s sake, Mr Modi had better not miss that window. 

If he does not do these four things then, regardless of what else he may announce, the Budget will be a missed opportunity. In fact, it will already have been a failure.

Please click here for the Complete Coverage of Budget 2014 -15


Image: Finance Minister Arun Jaitley.
Photographs: World Economic Forum/Wikimedia Commons

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