The administration can't do anything dramatic in the Budget
In London, you can see sad old men in dirty raincoats, standing at street corners and "flashing" their private parts at pedestrians, desperately trying to regain their virility. The BJP government too seems to have been reduced to this pitiful condition. Sapped by its allies, it is now indulging in political exhibitionism.
Nuclear or not, a country is powerful when it is rich. India can only be globally virile when 500 million, not 50 million Indians are prosperous. Otherwise, all this nuclear posturing reduces to a "flash" in the pan! The only way global bullies like the US can be silenced is through gaining economic muscle. China has learnt this lesson. India has not.
The budget offers a change to gain some real virility. Can this government rejuvenate the economy or at least start the process? First lets get one thing clear: bilateral sanctions do not debilitate the economy. Trade is important, but not crucial, for our economic fortunes. Our failure to attract significant FDI has come as a perverse blessing it is so small that a diminution would not matter.
Of course, there is one serious impact of these sanctions: much bilateral aid goes to projects targeted at the poorest of the poor. With that money frozen, the poor will be affected negatively. But who cares? The middle classes are "bomb happy", let the wretched poor suffer, they always have, havent they?
But what should worry even the rich is the impact of multilateral sanctions on our already precarious fiscal position. The budget must take into account the contingency that these will come into effect. If they do, Indias capacity to finance its growing fiscal deficit will be seriously jeopardised, as will the balance of payments. And portfolio and direct foreign investment will fall because our political risk rating will almost certainly be downgraded.
Past attempts to lower the fiscal deficit have focused on starving the public sector of resources. The rich have not been touched. Taxes have been lowered, subsidies continue to be doled out, the babus have just received a pay hike for working under 200 days a year. The right thing to do, of course, would be to downsize the administration, stiffen the tax regime, and invest in infrastructure. Politically, however, this is not so easy. Take tax collection. Perhaps the government could use the RSS to storm-troop the lalas and collect taxes? Perhaps the VHP could collect money for temple building and share it with the government?
The point is that this government cant do anything about these issues. The babus are sacred cows, the lalas are old and valued friends, the public sector is a political instrument to be used and ignored at will. So lets forget about any dramatic changes in the budget. That would require a government which is sufficiently inclusive or sufficiently independent of the rich and powerful interest groups, not this unstable insecure administration.
At the margin, however, some things can be done. First, a pro-poor budget is essential. The government should match, rupee for rupee, all money frozen or withdrawn from spending on services for the poor, as a consequence of sanctions. Second, it must come up with a list of public sector projects to be properly funded by the public exchequer. Certainly, there is no case for doing this with Ashoka Hotel or Air-India. There is a case for doing this in power, steel and railways. And it needs to be done now.
Third, the government needs to decide how to downsize the administration. This is a medium-term goal, but a start needs to be made now. Fourth, it would be helpful if the direct tax regime were stiffened again. We need a simple- say three-rate tax band with few or no exemptions. The government would then have done all citizens a service and made it easy for a successor less in hock with lalas to improve tax collection.
Mr Sinha used to be a socialist. Perhaps this will strike a chord in him, and he will take steps to rejuvenate the economy at least at the margin. Our poor, indebted, unequal, nuclear country needs strong economic medicine to become really virile. This government cannot do all that. But it can make a start. Lets hope it does.