Economy Jul 31, 2012
Dear Mr Chidambaram,
Congrats on your return to the finance ministry. The ministry needs a competent political head - something that has been in short supply for a while. So welcome back.
Your predecessors-both the politically competent Pranab-da and the soft-spoken PM-did not achieve much, but it is difficult to hold this against them, for they were not given the political backing necessary from your party high command. Nor should you be expecting any at your end.
If Sonia Gandhi is unlikely to expend political capital over big-ticket reforms, and Mamata-di is going to put a spanner in the works every time you propose some big idea, you too won't achieve much. Your best bet thus is to deal with small reforms that have nothing to do with Mamata-di or Mulayam Singh's predilections. But together they will add up to something big.
So let's be clear. Foreign direct investment (FDI) in retail may be needed at some point in time, but there is no need to bet the UPA farm on it in the hope that everyone will sign up for it. Insurance reforms can wait.
Here's a checklist of 10 big and small reforms-something we noted earlier-that don't need Mamata Banerjee to sign on, or Mulayam Singh to be propitiated with gift packages for Uttar Pradesh.
First, take up the easy ones on which no consensus is required. Aviation FDI is a no-brainer. And pension reforms that the BJP is willing to back can easily be pushed through in the next session of parliament. So go with them.
Second, energy. You cannot raise diesel prices by big amounts.The right way to do it is by stealth, in dribs and drabs. What you should do is keep raising energy prices in very small doses - say Re 1 a litre of diesel every two or three months (not the Rs 10 we need to make it profitable for the oil companies), and keep doing it till the economy adjusts to deregulation. A simple way to do it would be to free diesel pricing and simultaneously bring down duties so that the real increase to the consumer is just Re 1 or Rs 2 a litre at any point. The same logic applies to fertiliser and other subsidies. Mamata-di may protest, but tell her how you have cut duties for her sake.
Third, you need to bring your budget deficit back in control. Here's a long-term administrative measure you can suggest to all spending ministries. Every new spending proposal from any ministry should be accompanied by its own means of financing. For example, if Sonia-ji wants to implement a Rs 1,30,000 crore Food Security Bill, ask her to approve a cess directly to fund that. Or to allow you to raise diesel prices by a similar amount. This way we will at least know who is paying for it. There is no need to run huge budget deficits to finance social spending. Also, spending ministries have the option of funding a part of the social spends through voluntary contributions, too. The job of government is to enable worthwhile social spending, not do all of it itself.
Fourth, insist that no public sector undertaking should be administered by any ministry directly. The job of a ministry is to make policy, not run companies. All government shareholdings should thus be transferred to a public trust owned by the president. The trustees should be public spirited persons of impeccable integrity. Their job should be to maximise value from these shareholdings for the taxpayer and the exchequer. Every government order that impinges on public sector profitability and autonomy should be routed through this trust. This way, Praful Patel will not be able to ruin Air India and force the airline to seek a Rs 30,000 crore bailout. And Coal India will not have to foot the power sector's subsidies. This is the reform that will face maximum political opposition: which child will let go of the lollipop? But if you can get Sonia-ji to accept this, Mamata-di can't do much about it.
Fifth, as finance minister you must adopt a policy of zero-base budgeting. Currently, a project started five years ago will continue to bleed the exchequer indefinitely merely because it remains unfinished, and even though it may no longer be needed. With zero-base budgeting, every project will be re-evaluated every year so that if it is not delivering the expected results, the government can pull the plug on it and cut its losses. The worst thing to do is keep spending more on white elephants just because they are there. A bonus: as old projects are scrapped, your budget deficit will get smaller.
Sixth, to get optimism back, you need to get the markets excited. The best way to do it is to fast-forward the disinvestment plan. Companies like SAIL and some banks can be put up for share sales immediately (government can raise at least Rs 20,000 crore here). Next, the private sector shares held by the Special Undertaking of UTI (SUUTI) - ITC, Axis Bank, L&T etc - can be sold either to the companies themselves as buyback or through the share auctions route (that's another Rs 20,000 crore). The Vedanta group can be asked to buy back the balance government holdings in Balco and Hindustan Zinc (Rs 17,000 crore is already on offer, and government can probably extract upto Rs 20,000 crore with some bargaining. If government can quickly raise Rs 60,000 crore through disinvestment, market optimism will return quickly. The mood of despondency will lift by December.
Seventh, to get the economy rolling you need to get investment flowing. The best way to do it is to instantly clear all projects held up for environmental and other non-economic reasons in one week. Some greens may protest. But this will immediately allow companies like Coal India, NTPC, and other big infrastructure and core sector companies to deploy their cash surpluses in productive capacity building. The green concerns can be addressed later, after the next elections. A tax concessions for investments made this year - like investment allowance - will get all businessmen excited. Only the Left will be pissed off, but who cares about them.
Eighth, elimination of subsidies must begin not with identifying the poor, but the rich. For example, once the Aadhaar Unique ID is established, anyone earning more than Rs 2 lakh, according to his tax returns, should automatically be lopped off from receiving cheap LPG or kerosene or diesel. It is easier to identify the rich than the poor in India. Identifying the poor can wait for later. Even Mamata-di can't object to this. At best she may want the rich to be seen as people earning more than Rs 3 lakh or Rs 5 lakh. But we need to make a beginning on this.
Ninth, the best way to ensure long-term fiscal consolidation would be to mandate that expenditure growth must be 25-50 percent lower than revenue growth every year till fiscal consolidation is achieved (say, a fiscal deficit of 3 percent of GDP or less). Thus, if revenue is expected to grow at 15 percent next year, expenditure should be held down to 7-10 percent. And if this is not achieved, fresh taxes should be imposed or unproductive expenses cut.
Tenth, in a dynamic economy, where the economic environment changes frequently, the budget cannot be a one-time event. Taxes, spending and policies have to be changed whenever objective conditions change - as we did in 2008-09 after the Lehman crisis. The finance minister is not an accountant, but the country's economic risk manager (along with the Reserve Bank chief). A budget thus has to become a living document that is adjusted frequently to meet new challenges emerging from global and domestic events.
In short, we need to abolish the budget tamasha where we lead everyone to believe that this is the final thing. It never is. Check last year's budget and see which major prediction has come true.
The answer is: not one. Not the fiscal deficit, not the borrowing requirement, not the disinvestment target, nor tax collections, nor spending, nor GDP nor inflation.
Why do we need a budget document that can't get anything right? Best to have plans and projects that can be modified with changing circumstances?
Wish you all the best in your third stint as FM. We hope you are able to bring back some of the magic of UPA-1 this time.
More From R Jagannathan.