Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.
This column first appeared in The Indian Express, on July 7, 2014. Like all products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are solely those of the author.
By now, the budget proposals will have been finalised. The finance minister may make some last minute changes, but these will not be substantive. The FM knows that his speech on July 10 will be closely heard and rigorously interpreted. He knows that as the first major economic statement by the government, investors will be looking for an affirmation of “Modinomics” — the combination of policies that on the one hand will eschew fiscal populism and on the other push the country back on to the trajectory of growth, jobs and entrepreneurship.
The focus of the budget speech will, of course, be on the arithmetic of the government’s finances. But the FM should digress. He should add a few paragraphs to lay out the markers of the government’s economic roadmap. There are four reasons for suggesting such a digression.
One, in the run-up to the budget, the government has emitted mixed signals. On the one hand, the prime minister himself has said that the public should expect tough financial decisions. His minister of state for finance has said that the government has inherited a near-empty coffer. Together, these statements would suggest that the budget will nix fiscal largesse. It will scale back subsidies, cut wasteful expenditure and offer no new entitlements a la MGNREGA and food security. On the other hand, the government has rolled back rail fare hikes and postponed the hike in gas prices. The presumption is that these were done because of the forthcoming state elections in Maharashtra and Delhi. The net result is confusion. Will the government hold fast to economic logic, as most people had come to expect, or will it repeat the pattern of past governments of talking about good economics but in fact deferring to populist politics? The expectations of the public from this government are high and the disappointment could, therefore, be correspondingly severe. The FM would do well to explain how he will resolve the tension between these two uneasy bedfellows.
In this context, it is worth pointing to the stranglehold of triple-digit oil prices. The march of the jihadi group ISIS across Iraq has caught the world by surprise. To date, this march has not rattled the oil market. The price of oil has hardly moved. This is because supplies have not been disrupted. ISIS is in control of north Iraq, whereas 90 per cent of Iraq’s oil reserves are in the south, and not one shipment of exports from the port of Basra has been affected. ISIS has, however, reminded everyone of the verity that the petroleum market is volatile and unstable. The Middle East sits on a powder keg. The FM is aware of this fundamental. He knows that notwithstanding the shale revolution in the US and the unlocking of new hydrocarbon frontiers in Africa, South America and Australasia, India will face triple-digit oil prices for some time to come. And that with 80 per cent import dependence, the budgetary burden of such high prices cannot be borne by the government or its public sector entities alone. It cannot afford to challenge the remorseless logic of the market any longer. A second reason for digression would be to explain to the public the consequences of continuing to subsidise energy. It would be to explain the trade-off between subsidies and development and to convey that the public will have to share some of the burden.
A further reason has to do with the perennial blocker of infrastructure. Economists have estimated that India will need trillions of dollars to create the infrastructure to sustain high growth. The government does not have this kind of money. The private sector will have to contribute. The challenge is to create an enabling environment and build healthy relationships between investors and the bureaucracy, and to reinvigorate the model of public-private partnership. Winston Churchill once said that “the era of procrastination must inevitably lead to an era of consequences”. The minister of power, Piyush Goyal, faced the force of this comment within days of taking office. A severe storm knocked down several transmission towers and a large part of Delhi was without electricity. An irate public came out into the streets to protest and while Goyal was justified in placing the blame for the electricity shortage on the policy procrastination of the previous government, which delayed investments in upgrading the transmission network, he had to bear the consequential brunt. More recently, a part of the GAIL gas pipeline in Andhra Pradesh exploded. Many people were killed and injured. The proximate cause of the explosion was a gas leak. The underlying cause, however, was poor maintenance and outdated equipment. The papers report the pipes were rusted.
Here, again, one could adduce that this explosion was the result of policy procrastination. The consequences have been severe and the directors of GAIL, most of whom had nothing to do with the management of the pipeline, will now face a police investigation. The larger point is that the the government’s growth-oriented agenda will lack credibility if it does not have a blueprint for financing the required investment in infrastructure.
A fourth reason would be to sketch out the contours of such a blueprint. In doing so, he should spell out the proposals that the government would implement to support such investments. Thus, in energy, the announcement of a commitment to align energy prices to the market; to accelerate the creation of a national gas grid ahead even of the creation of a gas market; to open up opportunities for private sector involvement in coal mining; and to ensure that funds raised through the levy of a cess on the energy industry — that is, the clean energy fund financed through a cess on coal, and the oil industry development board fund financed through a cess on oil and gas production — are used for financing energy infrastructure and energy innovation (as has always been the intent) and not sequestered (as is the case today) by the Central government to reduce its fiscal deficit, would galvanise investor interest. In parallel, the FM must reinforce the message that the government will respect contracts, provide a level playing field, offer competitive terms, simplify regulations and protect investors against over-zealous taxmen.
The final reason should be to reinforce the prime minister’s message of the need to weaken the nexus between economic growth and environmental degradation. The PM has called for a “saffron” revolution, or rather a shift away from the current fossil fuel based energy system towards one that is based on non-fossil fuels and in particular, solar energy. He has also called for a “blue” revolution — the cleaning of our rivers and safeguarding of our water resources. The underlying logic is sustainable growth. A hike in our economic growth numbers would be of ephemeral value if it led to a degradation of our environment. The FM should put some flesh around this message and if not too late, offer specific proposals to reinvigorate the agenda on clean energy.
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