BanglaBhoot
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A backward step for India and its poor
India's Congress Party was re-elected in May on a promise of economic populism that the country can't afford. Yesterday the government delivered on that promise. This is bad news for India, and especially for its poorest citizens.
The budget outlines three priorities: 9% economic growth, "inclusive development" and better public services. It would achieve these outcomes by boosting spending by 36% to 10.2 trillion rupees ($211 billion), mostly on handouts and infrastructure. No major public-sector rationalization or private-sector liberalization were announced.
This is in effect a revival of India's socialist past and a rejection of the 1990s reforms that gave India the best kind of "inclusiveness": economic growth. Finance Minister Pranab Mukherjee was explicit about this political sea change: "Aam aadmi," or the "common man," is "now the focus of all our programs and schemes," he said yesterday. He extended a raft of loan and job guarantees to the poor -- programs that are already eating up around 1.3% of GDP and will only grow.
The budget is in line with party leader Sonia Gandhi's emphasis on populism, but it's especially disappointing given the track record of Prime Minister Manmohan Singh, who once upon a time was an economic reformer. Mr. Singh's boosters claimed his lackluster reform record in Congress's first term was because he had to rely on left-leaning political allies to form a governing coalition. Now Congress has dumped those partners -- and there is no excuse for moving the country backward.
The great irony is that by extending government's influence in the agricultural sector, which employs 60% of the workforce, Delhi is only retarding its growth. India's challenge is to move its poor from the farm to the factory. The more government shovels subsidies and free rice at farmers, the less willing they'll be to find other means of employment. High tariffs and barriers to entry have also stunted competition and innovation.
Mr. Mukherjee seems to understand some of these ideas, at least in principle. Yesterday he said private investment was "the principal growth driver" of India's boom years. Yet he did nothing to ease private industry's tax burden, cut regulatory red tape or liberalize the country's restrictive foreign direct investment regime. He also praised Indira Gandhi's 1969 bank nationalization as "wise and visionary" and "an inspiration." So much for freeing up capital flows at a time when credit is contracting.
Delhi's largesse will have serious fiscal consequences. Since the government isn't cutting back on its own sprawling bureaucracy, Mr. Mukherjee proposes to sell slices of government public companies to help finance this spending spree. But the bulk of the funding will come from bond sales and tax hikes, crowding out private investment. In the meantime, economists project the outlay will send the fiscal deficit soaring to more than 10% of GDP -- the largest in almost two decades.
More worryingly, the Finance Minister implied that there is more spending in the pipeline, based on the erroneous assumption that Delhi's last three fiscal stimulus packages were "effective." India's 6.7% growth rate last fiscal year represented a significant slowdown from its 9% growth the year before. All signs are that the economy is slowing further in the face of an export collapse and slowing consumer spending.
There were a few good ideas in the budget. Mr. Mukherjee promised to simplify the tax code, but he's layering on more taxes before he does so, proposing, among other things, a goods and services tax. India desperately needs better infrastructure to facilitate trade, so Mr. Mukherjee's plan to increase spending for highways, railroads and other urban public works is welcome. But the broader theme of spending without constraints or accompanying liberalization is setback for growth. Mr. Mukherjee said yesterday "the road ahead will not be easy." He is not making it any easier.
India Budget Blowout - WSJ.com
India's Congress Party was re-elected in May on a promise of economic populism that the country can't afford. Yesterday the government delivered on that promise. This is bad news for India, and especially for its poorest citizens.
The budget outlines three priorities: 9% economic growth, "inclusive development" and better public services. It would achieve these outcomes by boosting spending by 36% to 10.2 trillion rupees ($211 billion), mostly on handouts and infrastructure. No major public-sector rationalization or private-sector liberalization were announced.
This is in effect a revival of India's socialist past and a rejection of the 1990s reforms that gave India the best kind of "inclusiveness": economic growth. Finance Minister Pranab Mukherjee was explicit about this political sea change: "Aam aadmi," or the "common man," is "now the focus of all our programs and schemes," he said yesterday. He extended a raft of loan and job guarantees to the poor -- programs that are already eating up around 1.3% of GDP and will only grow.
The budget is in line with party leader Sonia Gandhi's emphasis on populism, but it's especially disappointing given the track record of Prime Minister Manmohan Singh, who once upon a time was an economic reformer. Mr. Singh's boosters claimed his lackluster reform record in Congress's first term was because he had to rely on left-leaning political allies to form a governing coalition. Now Congress has dumped those partners -- and there is no excuse for moving the country backward.
The great irony is that by extending government's influence in the agricultural sector, which employs 60% of the workforce, Delhi is only retarding its growth. India's challenge is to move its poor from the farm to the factory. The more government shovels subsidies and free rice at farmers, the less willing they'll be to find other means of employment. High tariffs and barriers to entry have also stunted competition and innovation.
Mr. Mukherjee seems to understand some of these ideas, at least in principle. Yesterday he said private investment was "the principal growth driver" of India's boom years. Yet he did nothing to ease private industry's tax burden, cut regulatory red tape or liberalize the country's restrictive foreign direct investment regime. He also praised Indira Gandhi's 1969 bank nationalization as "wise and visionary" and "an inspiration." So much for freeing up capital flows at a time when credit is contracting.
Delhi's largesse will have serious fiscal consequences. Since the government isn't cutting back on its own sprawling bureaucracy, Mr. Mukherjee proposes to sell slices of government public companies to help finance this spending spree. But the bulk of the funding will come from bond sales and tax hikes, crowding out private investment. In the meantime, economists project the outlay will send the fiscal deficit soaring to more than 10% of GDP -- the largest in almost two decades.
More worryingly, the Finance Minister implied that there is more spending in the pipeline, based on the erroneous assumption that Delhi's last three fiscal stimulus packages were "effective." India's 6.7% growth rate last fiscal year represented a significant slowdown from its 9% growth the year before. All signs are that the economy is slowing further in the face of an export collapse and slowing consumer spending.
There were a few good ideas in the budget. Mr. Mukherjee promised to simplify the tax code, but he's layering on more taxes before he does so, proposing, among other things, a goods and services tax. India desperately needs better infrastructure to facilitate trade, so Mr. Mukherjee's plan to increase spending for highways, railroads and other urban public works is welcome. But the broader theme of spending without constraints or accompanying liberalization is setback for growth. Mr. Mukherjee said yesterday "the road ahead will not be easy." He is not making it any easier.
India Budget Blowout - WSJ.com
