The Hindu Business Line : Politically astute

SHORTLY after assuming office as Finance Minister, Mr P. Chidambaram, said that he would like to be remembered as the Investment Minister. It is too early to say if savings and investment ratios continued their improving trend of the previous two years in 2004-05. But the Minister makes a sincere attempt to ensure that they at least do so in 2005-06 with his fourth Budget, the second in this round.

The good thing about this Budget is that it does not appear to have the potential to damage the incipient investment boom. Furthermore, it makes a serious attempt at pushing through infrastructure investment.

The author has no problems in accepting the use of India's foreign exchange reserves to finance infrastructure spending as long as these reserves are not blended into the Consolidated Fund of India but are transparently utilised and reported to the public.

The Finance Minister has done that with his intent to create a Special Purpose Vehicle. He should go well beyond the setting up of the SPV and ensure that this special endeavour becomes a model of transparency and accountability for the rest of the government to live up to. Extension of the National Highways programme and other infrastructure initiative are, prima facie, laudable but a more critical evaluation can await outcomes rather than outlays as the Minister put it himself.

A noteworthy feature of the Budget speech is the Minister's attempt to draw upon national pride. He recalled the experience of receiving a derisory glance from his Chinese counterpart on the issue of Foreign Direct Investment receipts at the recent G-7 meeting. Judging by the reaction of a CPI(M) to the Budget, India needs to receive many such derisory glances before the Leftists would be moved to support any foreign investment liberalisation. One must also appreciate the political management involved in de-linking banking sector reforms from the budgetary exercise.

The score-card on the implementation of the Fiscal Responsibility and Budget Management Act in less than a year of its legislation is that the Minister is compelled to suspend it for a year, despite the country's finances being `perilously close to the limits of fiscal prudence'. The other homage to fiscal prudence is to show a higher revised revenue deficit estimate at 2.7 per cent compared to the original Budget estimate of 2.5 per cent of GDP. The fiscal deficit is expected to be brought down to 4.3 per cent of GDP next year. This appears to be a hopeful rather than a realistic exercise as much depends on revenue buoyancy that is assumed in the estimates.

The proposal to evaluate each Plan project before sanctioning additional funding is welcome. In his last speech, the Minister proposed to distribute food stamps in a few pilot districts and invited States to participate. It is unfortunate that he did not update us on that proposal.

In the Budget Estimates for 2005-06, privatisation or disinvestment receipts are conspicuous by their absence. This alone should provide for the government's stability, even if fiscal stability is jettisoned.

Sarcasm apart, it is a sad way to buy political peace. Privatisation raised the benchmark, unshackled investment and employment and, importantly, deepened the capital market. If investment spending were to rise and be sustained, the capital market choices for investors should continue to expand. Privatisation is an integral part of that exercise. This government is harming the country by sacrificing good economics for expedient politics.

The exclusion of mobile phone ownership and the inclusion of electricity consumption in the criteria for filing income-tax returns is a bad idea. In a country that is hurting from rampant power theft that is a needless encouragement to the public to indulge in more of it and pay less for power consumption. This should be dropped.

Overall, there appears to be an attempt to downshift the importance of the Budget as a policy document of the government. If it was deliberate, it deserves to be commended. The Budget may not have fulfilled some expectations but, on balance, does not threaten to damage the business and investment sentiment.

Fiscal consolidation continues to elude India. It is a political process and India's political class has little understanding of and appetite for the painful choices it entails. Well, it took an external payment crisis to unleash economic liberalisation.

(The author is the Founder-Director, LIBRAN Asset Management (Pte) Limited, Singapore. The views are personal. Address feedback to van@libranfund.com)

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