One of my earliest columns on the Union Budget was in March 1990 in response to the late Madhu Dandavate’s debut Budget speech that he claimed was shaped by his “non-doctrinaire socialist pragmatism”.
Perestroika was then in the air and Dandavate too claimed he would undertake ‘fiscal restructuring’ to restore fiscal stability. In the event, the headline for my column was ‘The fisc runs riot’. Living up to his socialist credentials, Dandavate admonished India’s rising rich, “We will come down with a heavy hand on those who give vent to their pomp and money power, by circumventing our laws and frittering away the scarce resources of the nation.”
The Vishwanath Pratap Singh government did not last long enough for Dandavate’s Budget to have any impact on the economy but during his brief tenure, he was widely criticised for showing less pragmatism and more socialism.
In the following three decades, no finance minister since Dandavate has come in for more criticism for a debut Budget than Nirmala Sitharaman.
In part, this reflects poor PR on her part. I have known finance ministers who would make personal calls to editorial writers to ensure more favourable comments than may have been warranted by the contents of the Budget.
In her early days in office, Sitharaman did not endear herself to the commentariat. More importantly, Sitharaman and Prime Minister Narendra Modi wasted the opportunity provided by the reassuring mandate of 2019, that strengthened the political support base of the Union government, by pretending that all was okay with the economy and no course correction was necessary.
Rather than admit that the economy was not in the best of shape and seek to bring it back on track, Sitharaman read a speech that sounded more like a pre-election manifesto than post-election agenda. I had said in these very columns that she had the opportunity to sound like a Manmohan Singh of 1991, conceding problems and promising course correction, but she ended up shaking confidence by, on the one hand, not doing enough and, on the other hand, intending to do more than necessary.
The ‘more than necessary’ part was the plan to tap sovereign bonds. It was shelved the moment the Swadeshi Jagran Manch opposed it. The ‘not doing enough’ part was addressed over the subsequent quarter with government introducing new policy initiatives after August 2019.
All that could easily have been part of the July Budget proposals. Thanks to the misstep of last July, the government has since had to be on the defensive on economic management. The only difference between 1990 and 2019 is that everyone felt free to lambast and lampoon Dandavate while most now do so with trepidation.
Dandavate did not get a second chance to retrieve lost ground, but Sitharaman has that second chance. Clearly, her second Budget speech will have to be one that will restore both economic momentum and her political reputation.
In a remark made on the sidelines of the World Economic Forum at Davos, the chief economist of the fiscally conservative International Monetary Fund, Gita Gopinath, made an interestingly nuanced statement on fiscal discipline. While pointing to the government’s decent record on fiscal discipline in its first term, Gopinath offered Sitharaman some fiscal space by pointing to the need to maintain this discipline “at least in a medium term perspective”.
That nuance offers the finance minister some additional time to return to the path of fiscal rectitude.
Right Time to Spend
Given the fact that the economy remains demand-constrained, the finance minister should step up public investment and spending, loosening her purse strings, while setting out a ‘medium term’ agenda for fiscal correction.
There is no need for the government to give up revenues through concessions on the direct or indirect tax side. The Bharatiya Janata Party should not seek to waste central government revenues in the hope of winning the Delhi state assembly elections in the week after Budget presentation.
Rather, a fiscal strategy that promises to boost demand through employment generation would also be politically helpful. The second big story of the Budget could be a bold programme of disinvestment and privatisation that alters state of expectations of investors and promises to increase the returns on investments already made.
Prime Minister Modi has recently adopted an interesting strategy: on the one hand, he has had meetings with several leaders of big business to reassure them of government’s intent to revive the environment for business and, on the other hand, he has allowed government agencies to punish business leaders for tax evasion, money-laundering and other misdemeanours.
This approach should also define budgetary policy: get tough on compliance, but regain trust of investors and ensure business-friendly policies. In fact, there is widespread concern about a return of the much despised ‘Licence-Permit-Control-Regulation Raj’ —that too at a time when the quality of manpower in government is, in fact, declining.
If budgetary policy can create a more trusting and rewarding environment for investors, keep revenues stable and boost demand through public investment and spending, then Sitharaman can hope for a better legacy than that of Dandavate.
The writer is distinguished fellow, Institute for Defence Studies and Analyses, New Delhi