UPA lacks gumption for tough budget

Posted by satvikvarma ⋅ March 16, 2012 ⋅ Leave a Comment

The Budget Session commenced with the Prime Minister appealing to all political parties to work together and cooperate in meeting the challenges facing the nation. Any other time, his statesmanship would have earned him laurels, but post the recent electoral debacle, it is the appeal of a weak government walking the coalition tightrope trying to pacify its belligerent allies and conscious that the Opposition will do whatever they can to exploit the situation. Add to this our fiscal deficit, inflation, stalled growth and it makes the job of even the most experienced finance minister unenviable. In such circumstances, what should be the Government’s priority and what does the future hold for economic reforms?
Conventional wisdom suggests that now is the time to reduce expenditure and cut down subsidies, especially on fertilisers and fuel. Tax receipts also need to be increased and given that the goods and services tax (GST) has been stalled by the Opposition, other tax reforms like enlarging the service tax net should be adopted. But Mamata Banerjee, UPA’s mercurial ally, has threatened that any increase in prices is unacceptable. So-much-so, that Banerjee is livid at her party nominated Railway Minister for having nominally increased passenger fares – the first hike in eight years – that she has demanded that he either roll-back the hike or resign. This warning, when the Railways Minister states that the hike is in the interest of the railways and will give meaning to a vision document authored by Banerjee during her term as Rail Minister demonstrates that she is daggers drawn and relentless.
No doubt, the Railway Budget is a pre-cursor to what one can expect from the Finance Minister and a tough Budget is perhaps the necessary bitter pill. But in the existing hostile political environment, a tough Budget means political risk that a weak government with an eye on the next Parliamentary elections is unlikely to take. In fact, confronted with the threat of survival, it is doubtful that the Government will introduce any economic policy measures that may lead to a face-off. Hence, regardless of the benefits associated with permitting foreign direct investment in multi-brand retail, or increasing foreign investment caps in certain sectors or the necessity of pension reforms, it appears that the Government may be weary of introducing any such initiatives. Politics today is about numbers and the Government is unlikely to introduce any policy measures for which it doesn’t already have the sanction or which it cannot pass with its current political numbers.
Thus, viewed from most perspectives, reforms will unfortunately get relegated to the backseat. Over the next few months, Government functioning will confirm that economic policy is very closely linked to politics. The reality is that what’s good for the country isn’t always good for political parties, since it doesn’t translate into votes. The Government knows well that a weak and defensive approach will expose it to further attacks. Bold measures can enhance its dwindling credibility and with the Government having little to loose, we would all want it to take decisions in the national interest. But as Winston Churchill said, “It would be a great reform in politics if wisdom could be made to spread as easily and as rapidly as folly.”