There is only one thing India's fiscal plan for 2012 will achieve: scare off investors
In 1991 Manmohan Singh, then Finance Minister, unveiled a series of reforms that ushered India on a twenty-year long economic boom. In 2012 Pranab Mukherjee, his current counterpart, announces a series of half-measures that makes everyone regret 1991.
In substance, that was the near-unanimous verdict on Mr Mukherjee's budget proposals for 2012/2013: a small leap backward, at a time when India really needs a second bounce. And a sorry reminder that, after a year of corruption scandals and aborted reforms, India’s politicians continue to be more part of the problem than the solution.
This year's budget should have contained two things. One is a credible, detailed plan to cut the country's fiscal deficit, something the Central Bank and investors have long demanded. The other was a pledge to launch wide-ranging structural reforms, in a bid to boost India’s anaemic economic growth.
The budget contained neither. On the public finance side of things, it did offer a reshuffle of taxes, with a greater emphasis on indirect taxes and a rolling back from personal ones. It also pledged to limit the massive subsidies the government pays on fuel, fertilizer and food, and said it would carry on with its disinvestment program. But the budget also proposed a massive shopping list of spending proposals on infrastructure, schools, highways, rural roads, programs for lower casts and school meals (to name a few). And it offered no clear vision of how the government would negotiate a cut with its unruly coalition partners, and how it would make public asset sales really happen (it delivered $2.75bn out of the $8bn it promised last year).
On the growth agenda side of things, the situation was more clear-cut. Mr Mukherjee simply had nothing to offer. He did try to put a face, by presenting things like lower customs duty on coal to alleviate shortage of fuel at power stations, more tax-free bonds issued to fund infrastructure projects, to stimulate investment, and an allowance for more foreign loans, to save India's bankrupt airlines. But nobody failed to notice that a rag tag of improvised measures did not amount to a credible plan to sustain economic growth, much less to a serious attempt at economic reform.
India's economy sorely needs a second wind. GDP growth, which the government projects at 7.6% next year, is flagging. India’s banks face a liquidity crunch, as shown by repeated Central Bank injections in the financial system. And worst of all, inflation, at 6.95% in February, is back – cementing expectations that India’s interest rates, among the highest in the world, wouldn’t be cut in the short term. Eurozone woes, higher oil prices, and other external shocks may have helped bring about this trio of bad news. But most economists reckon supply-side constraints are the main ones to blame. A fractured agricultural supply chain, creaking infrastructures, and a deficient education and health system, among others, continue to act as structural bottlenecks on the economy – prompting it to overheat each time it gathers pace.
To address these India will need the help of private investors. But this is probably where India's budget was the furthest off the mark. First, by introducing new taxes, and raising old ones, on certain forms of venture capital – despite pledging to promote them with tax exemptions. Second, and most importantly, by proposing a retrospective amendment of capital-gain tax legislation, whereby foreign companies who invested in Indian firms over the past 20 years could be faced with a massive tax bill. This new law would overrule a recent decision by the Supreme Court, reopen tons of cases investors thought settled (such as the Vodafone one), and perpetuate a climate of business uncertainty. Hardly the best way to draw foreign cash in the country.
Maybe all this makes for good politics. The Congress-led government faces a very difficult national poll in 2014, and distributing fiscal handouts, whilst bashing big and foreign business, may help grab a few votes in the meantime. But on the economic front, it looks like India continues to sell itself short.