Column

In Charles Dickens’ novel David Copperfield, the character Wilkins Micawber represents the fictional embodiment of someone who lives eternally in the hopeful expectation that “something will turn up” and rescue him from his misfortunes. The budget that Pranab Mukherjee presented on Monday is Micawberish at many levels: it wallows in the optimism that “something will turn up” and restore the Indian economy to high growth while miraculously restoring a sense of balance to the mounting fiscal deficit.

So overwhelming is Pranabda’s faith in this developmental deus ex machine that he made not the feeblest attempt in his budget speech to lay out a roadmap to this Utopian world.

Thus, for instance, Mukherjee’s budget projected that the central government’s fiscal deficit would soar to 6.8 per cent of GDP in 2009-10, against the original forecast of 5.5 per cent. But apart from making some ritual genuflections to fiscal responsibility — he remarked that it was important to return to fiscal deficit targets “at the earliest possible opportunity” and that “reforms were required” to curb the fiscal shortfall — he offered nothing concrete.

The delay and policy drift that surrounds the initiation of a process of deficit reduction comes at a price. Financial markets look for policy clarity and credibility and a delay shatters the credibility of the programme in the eyes of investors.

Even with subsidies, Mukherjee had nothing more than vacuous promises of committees to examine, for instance, the feasibility of more flexible domestic oil prices and lower subsidy bill. All these can and will be read as signs of an inability or unwillingness on the government’s part to take hard decisions.

The budget also shows up a disturbing political divide that manifestly wracks the Congress. To many in the party, the election victory earlier this year represented the triumph of “welfare politics” that underpinned the farm loan waiver and the rural employment guarantee programme of recent years.

Barely days before the budget the Economic Survey had presented a virtual “wish-list” of reform proposals from finance ministry mandarins. It was this that heightened market expectations of a “reformist” budget. But the philosophy and rhetoric of Budget ‘09 establishes that the peddlers of “welfare politics” within the Congress have won this round.

One of the biggest lessons for India from the economic predicament that the US finds itself in today relates to the folly of postponing structural reforms. America’s healthcare and pension systems have been in need of an overhaul for years; but the political failure to address them when times were good meant that the problems have come home to roost in difficult times. In India’s case, deficit reduction was one of the key areas where structural reforms were desperately needed, with some imaginative policy measures, including disinvestment from state-owned companies.

The ideal time to disinvest would have been during good times, when stock markets were booming, when such an effort would have secured more bang for your buck — and additionally restored some order to the government’s balance sheet. The latter, in turn, would have enabled the government to come up with some real stimulus package during down times.

There’s one additional risk in Mukherjee’s Micawberish approach: that “something that turns up” may not always be a happy occurrence. The very real risk of a sub-par monsoon this year could upset all the government’s best-laid plans and hopes of a sustained recovery.

What that will do to the government’s balance sheet is best summed up by the ‘Micawber Principle’ on the risks of living beyond your means. “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”