Most of the comments pertaining to Budget 2006/07 had one common relief theme – phew, the UPA government is not as populist as we all had thought. The all important fiscal deficit was down, so it certainly was the case that the government, populist warts and all, was resisting the temptation to spend its way towards a political recovery in the forthcoming elections. The fact that populism has reigned supreme for two years and yet the UPA has lost every election it has fought since it came to power should sober most politicians. But the UPA, and the Left, invariably project the image that they are different than most – they are the anointed elite, and because of this anointment, they are the privileged caretakers of the poor. Hence, the heartfelt concern, and policy, of the FM to turn back the clock on interest rate reform by regulating interest rates; but it is okay, because he is only doing it for the poor farmers. His speech also had a nice allegory of the mount, the journey, and the destination of social justice of the UPA. He said it with a sense of discovery.
What a positive yawn! If it weren’t for some wild ones in the stock market (who created some artificial volatility by dragging the index down 1 % before ending it up 1 %), one would not have known that today was India Budget day. Which is as it should be – and it shows that India, despite changing governments, is continuing with the strategy of slow and steady economic reforms. This budget has consolidation of the tax regime (good), recognition that there were some bad taxes last year ( e.g. fringe benefit and cash withdrawal taxes – very good), expenditure consolidation and greater concentration on investments (have to wait and see for the effects, but a good sign nevertheless) and an onward march towards fiscal prudence (excellent – especially since the temptation to increase spending more than growth was resisted). All in all, not a populist budget at all; rather, a boring, pedestrian budget with a vision of a new, emerging India. Right on.
Unlike just 5 years ago, Indian financial markets are coming of age. So much so, that the Finance Minister, Mr. P Chidambaram, is (correctly) visualizing India as a major financial capital. A very realistic dream. India has a huge natural advantage – the time zone. Our time zone straddles all the financial markets of the world; we wake up just about the time the Asian markets are getting started, at lunch the European markets open, and more than half the US trading is over by the time we go to bed. Surely the place where a lot of investment banks etc. would want to set up shop. Add to it our other cost advantages, especially labor, and you can see how quickly India can achieve the dream. No worry about these jobs going to China since they do not have the time zone advantage. A major financial centre would mean increased employment, increased profits, and higher tax revenue. So much extra tax revenue that the government can finance even more of its projects to help the poor. An ideal situation, therefore, and one which the Left should also endorse: rich man’s taxation to finance poor woman’s development.
It was three years ago when I wrote the article “Globalization and the Chinese Bamboo” (Business Standard, Jan 4, 2003). The rain induced 8 % plus GDP growth of 2003/04 was not yet a reality, but I still predicted that “there is virtually nothing that the politicians, or bureaucrats, or industrialists, can do to prevent the 8 percent target from being achieved by India in the near future”. This forecast was met with near universal derision, and some of my friends were even hasty with the bet that I would be way off the mark. Today, I am going to write about how 8 % GDP growth for India is no longer a “man bites dog” story. And how, despite the best efforts of the present populist government, there is little that they can do from this reality continuing.
The US dollar has defied all forecasts. The dollar index is trading at a 7 month high, and this at a time when its current account deficit is approaching 7 % of GDP. The Japanese yen, the Euro and the Indian rupee are trading at 19 month lows. If there are any fundamentals that are driving the dollar to these multi-year highs, I don’t know of them. Let’s consider interest rates. European interest rates have begun to rise again, after having declined since Oct. 2000. Japanese interest rates are scheduled to increase from their near zero levels of the last four years. Let’s consider stock markets. This calendar year, European stocks have risen about 20 %, Japanese stocks about 30 percent. US stocks – despite the year end rally, they are barely in positive territory. Let’s consider growth rates. US growth is slowing down marginally, whereas both Japan and Germany are no longer the sick men of the world. Indian growth rate has exceeded 8 % for the first time in a year not following a drought, and India has just displaced the US as the second most attractive FDI destination. Yet today (Dec. 6th) the dollar is trading at 121 yen, 1.17 euros, and 46.35 rupees. As Marvin Gaye would say, “What’s going on?”
I have long been a believer in the economic determinants of voting in India i.e. people vote with their minds, and vote for performance. But being an empirical junkie, there seem to be so many exceptions to this rule, that I have started to reluctantly believe in the theorem that performance is definitely not one of the determinants. Electoral success has many fathers, and we may find it difficult to ascertain the contribution of each. But we can definitely rule out the contribution of performance. This theorem applies only to incomparable India; in western democracies, it is likely that economic performance matters a lot.
It pains me just a little bit to change the name of this column. Indian policy debates have never been dull, a major reason being that “we are that way only” So the first series was called Beyond Logic. Then came Looking for Logic, then Calling the Bluff. My attempt in most of my articles has been to look at data seriously, and respectfully. The analysts hurt by this exercise have predictably responded with “Lies, damn lies and statistics”. This is how the great con game, also known as steep intellectual dishonesty, is played. The tendency of most Indian intellectuals is to believe that things have not really got better for the average Indian, let alone the poor Indian. So facts are deliberately transformed into lies. Strong words, but proof is there.
Two Indian institutions have withstood the test of time and emerged, time and again, as saviors of India – the Supreme Court and the press. Now both are under attack. The Supreme Court for its highly illogical (illegal?) decision that the politically motivated dissolving of the Bihar assembly was unconstitutional (so far so good), but that the consequences of this anti-constitutional act were okay, especially given the “political realities” (so far, terrible). I am not a lawyer, but how does one challenge a contemptuously flawed Supreme Court ruling?
Several recent reports from the NGO community (World Bank, UNDP, Earth Institute, -Jeffrey Sachs) have commented on inequality in the world. Many of these comments are in the nature of “dog bites man” i.e. facts we have known for decades, if not centuries. That there is inter-personal inequality, gender inequality, deep poverty, inhuman existence for millions, unequal opportunity for billions, are facts that everyone is familiar with, cognizant of, and acted upon. Been there, seen that, done that policy. What is relevant for the international community is the identification of policies that have helped to reduce poverty, reduce discrimination and perhaps even to reduce inequality. This can only be learnt by first looking at what has actually happened in poor countries over the last several decades. This the above mentioned NGOs purport to do, and this is where they fall into the ideological, and dishonest, trap of selection of data, and interpretation (or as “authors creation” or authors manipulation” as the WDR candidly admits to being its “sources”.)
When asked about his government’s record on reforms, Mr. Chidambaram, somewhat innocently but perhaps disingenuously asks, “If reforms have slowed down, how are we registering high growth?” Interpretation: It is the great leadership of the Congress party that has allowed economic growth last year to be 6.9 percent, and this year to be near 7 percent; that has allowed the Sensex to be higher, and Indians to be richer, and for India to have a woman tennis player in the top 40. One might also add, according to Mr. C’s logic, that if my temperature is normal today, I will stay well tomorrow.
