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'Budget marks an end to Sachin Tendulkar syndrome in govt'

Subir V Gokarn is the chief economist at the National Council of Applied Economic Research, a leading think-tank and policy adviser to the government of India in general and the ministry of finance in particular. In an interview to Amberish K Diwanji, he spoke about the highs and lows of Finance Minister Yashwant Sinha's second Budget.

What are the good points in the Budget?

One good thing about the Budget is in what it has not done. Yashwant Sinha has resisted the temptation to deal with the short-term problems, doing only a few things in that direction.

There has been a short-term-long-term dilemma in the economy. There has been a lot of pressure on the government to deal with the recession but a lot of the suggestions coming to the government were actually antagonistic to the long-term investment process.

Of course, protection has been raised slightly but it is not a terrible thing. One has to concede some amount to the political pressure. But the housing initiative really combines both the short-term and the long-term investments. Housing involves financing, construction and the consumers. So all three have been given significant benefits. This should be a major component of any economic recovery.

The main strength of this Budget is its philosophy. It has recognised that there is a limit to the finance ministry's ability to solve all the problems of the economy.

For a long time, the finance ministry had become almost the solo player in the reform process. All reforms are supposed to come from the finance ministry, all reforms are supposed to be done by the finance ministry. Nobody else is involved.

For the first time, the finance ministry has signalled that we have come to an end of that stage. Henceforth, reforms will have to be a broad-based and all-encompassing process.

Why do you say that?

Look at the earlier Budgets. Major financial initiatives were announced by the finance minister during the Budget such as industrial delicensing, various tariff rates, FDI, reducing tax rates. These have gone as far as they can go. The finance ministry's role in the political economy is based on these four or five aspects. Therefore, this time there was very little tinkering with the economy, no gimmickry, all of which we have seen in the previous Budgets.

In this Budget, the finance ministry has taken the initiative to put in assistance for agriculture, small-scale industries. Yet, now it is up to the ministries concerned and the legislature to do their job. In fact, a lot of legislation is still to be passed in Parliament.

The next phase of reforms depends on the legislature. We have not seen any significant legislation for a long time, right from the last two years of P V Narasimha Rao. And because of the gridlock of not passing legislation, the finance ministry became the focus, a kind of Sachin Tendulkar syndrome that everything depended on the ministry.

That is why we are seeing so much time and energy wasted not just in covering the Budget but also in the build-up to the Budget presentation. This is a total waste of time: I don't see why we have to spend so many hours of professional and media time on the Budget. It is ridiculous!

What else remains to be done?

Besides the legislative aspect, much work is needed in the development of the debt markets and so on. Thus, institutional changes are also needed. But that will come, I hope.

The economy has been described as being in the doldrums....

How can you describe an economy growing at 5.8 per cent of the GDP as being in the doldrums?

But doubts have been raised about the figure regarding the growth rate and the government's statistics.

The worst estimate of the economic growth is 5.3 per cent of GDP, the best is 5.8 per cent. These are just margins of error. Even at 5.3 per cent, it is good.

Still, industrialists have been crying hoarse about the drop in manufacturing. Do you see that picking up?

The first aspect is what has caused the recession, the slowdown. There are two factors. One is the slowdown in exports, which had peaked at ten per cent of GDP and has now gone down to 9.2 per cent. The second is agriculture, which is around 26 per cent of GDP and has not grown for the last two years.

Now, both exports and agriculture are big consumers of manufacturing. The huge growth we saw in exports over the previous three years is almost entirely from manufacturing. And agriculture has increasingly become a larger and larger consumer of manufacturing, much more than what was seen say 20 years ago.

The minute we see a recovery in agriculture, which is going to happen this year according to the Economic Survey -- and I don't see it as a false prediction -- we will see manufacturing pick up. At least the part of the slowdown caused by the agricultural slowdown will disappear.

This year (1999-2000), the government expects an agriculture sector growth of over five per cent. But if you see the earlier years, 1997-98, 1998-99, we saw a slump in agriculture production. It began to recover in the latter part of 1998-99.

So the economy is doing fine in spite of the slump in manufacturing?

There is certain conceptual point that has to be noted here. Is manufacturing the fountainhead of the economy? We believe so because historically, countries have grown in a particular way with manufacturing leading the way.

As services become more and more tradeable -- historically, services have not been tradeable, but are becoming more and more so now -- that model of manufacturing leading the way is no longer valid. So the fact that manufacturing may slow down does not necessarily mean that the economy has slowed down.

So the increase in services has benefitted India?

Sure. The trade in services having exploded and we don't quite know how to handle it data-wise. It is very difficult to calculate services, but whether you are exporting garments or software, demand is demand and it benefits the economy.

What did you not like about the Budget?

There was a fair amount of useless stuff in the Budget. All of these various schemes which we more or less accepted as gimmickry with no follow-up, but to some extent this is inevitable.

The main things that I object to are protection such as the increase in customs duties and the increase in the price of diesel which I don't understand. The price of diesel was brought down some time ago and now the government has increased it again. Anything that reduces competition and makes inputs into the economy expensive is bad.

The tax increase is not so bad. It is just a ten per cent surcharge on tax paid, which works out to an increase of 1.5 per cent or so.

What about cutting expenditure?

I find the abolition of secretaries very useful. It may not amount to much, but it makes the point that if you want to cut expenditure to help the economy, you have to start at the top. Unless the government does that in a more significant way, all other efforts will be in vain.

Do you see the fiscal deficit coming down to four per cent of GDP as stated by the finance minister?

Absolutely! We have growth at six and a half per cent this year, then there should be no problem. And a growth of over six per cent should not be difficult unless the monsoons fail. So far the rabi production looks good and therefore a growth of six per cent is achievable.

What we need to emphasise is that regardless of all the reforms of the past few years, we are still very dependent on agriculture, both from the inflation and demand points of view.

The stock markets shot up after the Budget, and are still going up. Obviously, the bourses are pleased with the Budget.

There is a certain method to this. The government could have done things to screw up the Budget, but it did not. Hence the market rising is not necessarily a positive acceptance of the Budget but its relief at nothing negative. The market recovery is also caused by certain sectors which the Budget addressed such as tobacco, pharmaceuticals, software and housing. If you saw the shares that really rose after the Budget was presented, it included Hindustan Lever (consumer goods), ITC (tobacco giant), Infosys (software), and Housing Development Finance Corporation. But with such buoyancy, the rally has to widen.

In the coming year, do you see the political instability affecting the economy?

There has been political instability for the past three years now, yet we have averaged a good growth rate. I think business is learning to live with political instability. The key is demand. If we have a good monsoon that helps agriculture to recover, then the economy will bounce back regardless of politics.

Give me your best and worst case scenarios?

The best is if agriculture growth and exports pick up, then we can have a growth of up to seven per cent of GDP. The worst is if agriculture collapses, exports don't recover and we are not going to get the surge from the Pay Commission that we got last year, then growth will be at around five per cent of GDP. These are my personal educated guesses, please don't attribute them to the NCAER. Exports are still in a bad shape, hence I would really look not at seven but at a six per cent growth rate.

The states are also in a bad financial position. What about their recovery?

The states are in a bad position because their fiscal positions are vulnerable to business cycles. Also, for states, tax revenues depend on industrial activity, such as sales tax, and on real estate earnings from stamp duty. This is particularly true of Maharashtra. But the recovery should ease their difficulties.

If you were in Yashwant Sinha's shoes, what would you do differently?

My assessment given earlier about other ministries doing their job is because I have been reading between the lines. If I were in the finance minister's shoes, I would have made this point very clear. I would have stressed that this is as far as the finance ministry can go, that expenditure agenda is with them, it is for Parliament to legislate. And I would not have raised the level of customs duties.

You spoke of other ministries doing their job. Can you specify which ones are in the forefront and what needs to be done?

The social development ministry has to be very, very sure on what it is spending its money on. The ministry has to ensure that the targets identified are reached. This ministry has to do some major restructuring.

Also, some ministries have become completely redundant such as programme implementation, and even the Planning Commission. These ministries should be shut down. Even if the government has given up any plan to downsizing government, as first suggested by the Fifth Pay Commission, the government should at least look at increasing the flexibility to redeploy the staff.

I think government employees are getting the best of both worlds -- complete security and complete rigidity. At least the latter one has to be negotiated so that employees in ministries not doing anything can be better used. It is for each ministry to decide what it has to do.

The finance minister also spoke of zero-based budgeting, and each ministry has to now identify and justify its projects. Thus it is in the hands of the other ministries rather than the finance minister.

Do you think the present government can deliver the goods?

I am beginning to sense that there is a dynamic within government that is distinct from politics. And that is the lasting contribution of the finance ministry to the country, that it has put the economy onto an agenda different from politics.

If you had asked me this question three months ago, I would have been very pessimistic. But the last three months, this government has shown a tremendous improvement, and what many expected from (Prime Minister Atal Bihari) Vajpayee is finally coming to the fore. There is now a sense of direction and some internal consistency.

How would you rate the Budget?

Good marks for the message to other ministries, minus a little for the protectionist steps. Overall, I would rate it at seven out of ten.

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