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The Rediff Interview/Subir Gokarn
'Budget is good for both economy and financial markets'Rediff Budget Chat
February 28, 2003
'The combination of spending, interest rate and tax proposals should give a reasonable boost to capital markets over the year,' says Subir Gokarn, Chief Economist, CRISIL.
On his views of the Budget
I give it a 8 on 10. An excellent budget for a fourth-year government, and as I said before, taking advantage of a favourable macroeconomy to give impetus to targeted spending. Two negatives: should have gone further on Kelkar recommendations and is full of little details that will put a strain on co-ordination, monitoring, follow-up, etc.
On whether this budget is in line with the rate of reforms expected by the world
Let's keep in mind that for the rest of the world, India is seen as the huge marketplace of the future. That is long-term, thinking, not ncessarily affected by a particular budget. But, each budget that stimulates growth brings that long-term future one step closer. If the assessment of this one is that it is favourable to growth, then obviously interest in India will increase.
On whether the Budget will really propel economic growth
The main lesson from the industrial recovery of this year is that properly targeted government spending can really help industry. In this case it was the highways programme. Also contributing was the housing boom, stimulated by falling interest rates. This budget clearly puts this lesson to use by reinforcing the thrust on infrastructure spending.Further, the relatively comfortable macroeconomic environment at home (the world is another thing altogether) provided the Finance Minister some space to take some chances. While many people, including myself, think he could have gone further, particularly on tax reform, he has done quite a lot to take advantage of the opportunities by increasing commitments to infrastructure. This is why most economists are quite upbeat about the budget.
On whether the Budget will make any difference to the poor people in India or it is an exercise just to please economists
The most powerful anti-poverty instrument is rapid and sustained growth. If the budget stimuates growth and facilitates its sustenance, then it is going to change the lives of the poor. As for helping only economists, have some pity on us! This is the one day in the year when anybody is interested in our opinions. For the remaining 364 days, nobody gives a damn for what we think. As the saying goes, every dog has his day. This should apply to economists as well.
On what is there in the Budget for women
I would not like to make a distinction between sexes when it comes to macroeconomic policy. I think there is a definite role for policies that address gender discrimination but it the job of the specific ministry, in this case, the ministry of women and child development to implement it. So, literally speaking, what is in the budget for women is its allocations for programmes being run by this ministry. I have not looked at the detailed allocations, but that is where I would look to answer your question
On whether the Finance Minister has shown the courage to take unpopular decisions that will ultimately benefit the masses and the country or whether it is another exercise at gimmicks in the run up to the election
Balancing the short-term and the long-term is the fundamental challenge of governance. Yes, difficult decisions which impose short-term costs have to be made, but equally, a government has the right to be concerned about its viability and re-election prospects. There are some situations in which good politics and good economics come into conflict. There are others in which they are compatible.This government discovered that compatibility in the highways programme and is obviously going to push that strategy to its limits. Basically, this is a budget that still maintains that compatibility. You may call it gimmicky, but at the end of the day, it is also reasonably sound economics
On how the Budget will go down with rating agency like CRISIL
Good question. Rating agencies do well when financial markets do well. This happens when investment activity picks up. So, anything that both stimulates growth and encourages new investment is good from the rating agency's perspective.But, we do not have an exclusively commercial perspective. Even though I work for a rating agency, I am still a professional economist. And, I have to evaluate the budget from this standpoint.In this case, both perspectives agree. This budget is good for the economy and good for financial markets as well
On the fiscal deficit of 5.6 percent of GDP suggested in the Budget
I think high deficits in general are not desirable. However, in the immediate context, you have to realise that industry contributes a disporportionate amount of tax revenues and as long as industry is doing well, government finances will not be under severe strain. If the budget is able to stimulate industrial growth, which I think it will, then I would'nt be too worried about the deficit for now. But, of course, it is incumbent on the government to deal with it through tax and expenditure reform.
On whether the interest cut will affect small investors
The interest rate cut is the government's signal to investors that they cannot endlessly challenge the yield curve. People will just have to look for other alternatives, which, by the way, are clearly making a presence in the marketplace, mainly by the insurance companies. Yes, there is a loss, but the point is that the scheme is basically just not sustainable.
On the contradictory signals sent out by the Budget: While car and liquor prices are down, oil and petrol prices are up, so can only the rich enjoy the benefits of the Budget?
You are suggesting that the rich consume only cars and liquor and the poor consume only oil and petrol. Pl take an integrated view. Everybody benefits if growth is faster.
On sectors that will benefit most from the Budget
At this point, construction-related sectors, consumer goods, particluarly in the lower price ranges and transportation services
On by when can India be on par with countries like Japan/USA/WesterEurope in terms of living standard at individual level and economic soundness at country level
I think a more reasonable aspiration is the standard of living of say Malaysia or Thailand, which they achieved with about 8-10 percent growth per year for about 20 years. At that level of per capita income (about 3000 -4000 US $) the majority of people are reasonably above subsistence level. Can we so the same thing? Not the way things are now, but with the right policy mix, good economic management and a lot of luck, I don't see why not. We have achieved a fair degree of stability, but not the required acceleration.
On how the capital markets will view the Budget
I think the combination of spending, interest rate and tax proposals should give a reasonable boost to capital markets over the year, keeping in mind the global economic scenario, of course.
On what else, apart form the Kelkar recommendations , he would have liked to see in this budget
Yes, some more movement on the implementation of the Expenditure reforms commission recommendations. But, for now, I'll take what I can get
On whether the agricultural sector is being neglected
One, this budget has a huge set of measures for the rural economy, so I don't think you can see it as neglect. But more importantly, agricultural policy is always a tussle between the states and the centre, so reform requires a joint effort, which has not been forthcoming at a national scale so far