SPECIAL REPORT: BUDGET
Of Reforms, Deficit And Inclusive
Growth
Businessworld
Much is being expected from the first union Budget to be
presented by the new UPA government’s Finance Minister, Pranab
Mukherjee. The current slowdown has raised expectations among
businessmen that this budget will do something to help the
economy get back to its 8 per cent-plus growth rates. Meanwhile,
the constant references to inclusive growth by various ministers
have made most anticipate a huge increase in social sector
expenditure. The fiscal situation is not particularly pretty, but there
is a school of thought that says one can ignore fiscal deficits in
order to promote economic growth. In theory, the Union Budget is
supposed to be nothing more than a statement of the
government’s proposed expenditure and revenues for the year
ahead. In practice, many finance ministers have used the budget
speech to signal policy changes and reforms. What will this year’s
budget look like? Four senior economists and policy watchers
— Pronab Sen, chief statistician & secretary, Ministry of Statistics
& Programme Implementation, Omkar Goswami, chairman of
CERG Advisory,Abheek Barua, chief economist, HDFC Bank
and Laveesh Bhandari, director of Indicus Analytics, debated the
issues before the government for over an hour and a half
with BW’s Prosenjit Datta and Rajeev Dubey.

Excerpts:
Prosenjit Datta: Gentlemen, thank you for joining today’s
discussion. Because of the backdrop against which this budget will
be presented, expectations are sky-high. It is expected to kick-
start growth, usher in major tax reforms, announce significant
social reform measures... But given the fiscal deficit situation, can
it really do much? Or will the finance minister ignore the fiscal
deficit?
Abheek Barua: Let me start with a favourite joke of mine. A
former US treasury secretary was asked, “What would you like to
be reincarnated as?” He said he would like to be reborn as the
bond-market so that he could come back and intimidate everyone.
I take what the bond-market says very seriously. And the bond
market is telling us that any fiscal slippage below the base of the
levels set out in the interim budget will have a very bad effect on
the lending rates.
FISCAL DEFICIT
“More stimulus will translate into a larger fiscal deficit. If we are
fiscally reckless, then government borrowings will begin to infringe on
the private sector.”
ABHEEK BARUA
“Every government in the world is going berserk in terms of budgetary
numbers and 10-12 per cent fiscal deficits are not merely common but
expected.”
PRONAB SEN
“I would be looking at no less than 5.5 but not more than 6 per cent as
the Centre’s fiscal deficit, meaning that we are looking at 9 per cent
depending on crude oil prices.”
OMKAR GOSWAMI
What I expect from this budget is that it will bring back some sense
of fiscal discipline, so that we don’t have an overwhelmingly large
government borrowing programme. Perhaps this can be done
through selective increases in the taxes or some cuts in the
stimulus spending. But what I clearly don’t want to see is more
stimulus being announced that translates into a larger fiscal deficit.
If we are fiscally reckless at this stage, then, over the next 6-7
months, we will run into a situation where government borrowings

will begin to infringe on the private sector. And this will spook
whatever little recovery party we have had till now.
There are various options before the government. If you talk about
balancing the budget, you have to rein in expenditure and raise
more revenues. I think we have some non-borrowing funding
options. In particular, disinvestment.
Datta: But will that be possible this year?
Barua: Well, if you look at the disinvestment possibilities and
things like the 3G spectrum auctions, we can realistically raise
between Rs 30,000 and Rs 40,000 crore, which is perhaps
minuscule when compared to the total government borrowing
programme. But it will be a good start.
Laveesh Bhandari: On your key point I totally agree. I am a fiscal
conservative and I don’t see any way that this government will be
able to keep up with the interim budget numbers. However, this
economy is being driven more by expectations than what is
happening in the markets on a day-to-day basis. So, one thing this
budget will need to look at very seriously is how it’s going to
manage expectations.
It’s clear that we are very ambitious on the major social sector
programmes. These are going to be strengthened. Given that,
growth will also be an objective. And that will require a range of
reforms. Now that’s where my opposition to creeping
disinvestment comes from. We have to, at some level, take some
tough decisions. We need to look at some very serious
administrative reforms. We need a much higher end IT back-end in
our government departments to be able to implement the social
programmes. Tough decisions need to be taken.
Pronab Sen: I wish the debate was not couched in terms of
whether we are fiscal conservatives or fiscal liberals. Fiscal
decisions really are, and should be based upon an appreciation of
what the drivers of the economy are and what role the budget is
playing in all of that. Now, in terms of the pressures towards fiscal
liberalism — all of it emanates from what is happening in the rest
of the world where every government is going berserk in terms of
the budgetary numbers and 10-12 per cent fiscal deficits are not
merely common, but expected.

There is this view in India which says, “look at what the rest of the
world is doing, and we should do it too”. The counter argument is
that “no, this is a terrible thing to do”. Both are ideological
positions, which I find unacceptable. The proper argument is
saying that the Indian experience is completely different from
what’s happening in the rest of the world. In the rest of the world,
the slowdown has been driven by consumer spending crashing.
Wealth has crashed, and consumers have pulled back. In India,
nothing of that kind has happened.
The slowdown that we are witnessing is primarily the outcome of
what’s happening in the export market — which is consumer
spending elsewhere crashing. Your budget can do precious little
about that. And investments are falling in tandem. Now in a
situation like that, a high fiscal deficit doesn’t necessarily add to
the recovery process directly.
The real issue is: what’s our take on exports and investments.
Exports are out of our hands and any effort at trying to replace
export demand through enhanced domestic spending is not only
futile, but also silly. The other issue is investment. And here, the
question is: what is the role of interest rates on the one hand, and
expectations on the other — the two points that were brought up
by Abheek and Laveesh. I would go along much more with
Laveesh. It is really the expectations which are the bigger drivers.
And today, we don’t have a clear take on what is driving investor
sentiments.
What one reads in the newspapers suggests that investors are
looking to the government. If that is the case, one needs to think
about the fiscal decisions seriously. And then what it would
suggest is that the level of the fiscal deficit is not that much of an
issue… the issue is the type of expenditures that are built into the
budget. There again, I think Laveesh is right that there is a lot of
pressure of political commitment on social sector programmes —
which, frankly, should not fill investors with any great joy.
On disinvestment, I disagree with both of them. If you are working
on expectations, we should be very clear that it is not how much
money that disinvestment brings in or whether it reduces the
pressure on yields of government bonds, but the fact that it is a
statement of intent. Today, you have a situation where the private
sector has cut back on its investment and you want them now to

start buying up the bonds of the PSUs. That is just as much
crowding out as any government bond issue...
EXPERTSPEAK
PRONAB SEN
Chief Statistician & Secretary, Ministry of Statistics &
Programme Implementation
“The slowdown that we are witnessing is primarily the
outcome of the export market — which is consumers
spending elsewhere crashing. Our budget can do
precious little about that. And investments are falling
in tandem. In such a situation, a high fiscal deficit
doesn’t necessarily add to the recovery process directly.”
OMKAR GOSWAMI
Chairman, CERG Advisory
“For creating better physical infrastructure in
upcountry India even if 50 per cent of the Bharat
Nirman programme could be implemented, it will
cause a fundamental face change in rural India. That’s
the mandate of this government. The mandate is not to
ensure that the denizens of south Bombay, looking at
Bloomberg terminals, remain incessantly happy.”
ABHEEK BARUA
Chief Economist, HDFC Bank
“A former US Treasury Secretary when asked,
‘What would you like to be reincarnated as?’ said
he would like to be reborn as the bond-market to
intimidate everyone. I take what the bond-market
says very seriously. And it is telling us that any
fiscal slippage below the base of the levels set out
in the interim budget will have a very bad effect
on the lending rates.”

LAVEESH BHANDARI
Director, Indicus Analytics
“This will be a cautious budget but at the same
time some tough decisions will have to be taken.
And this is the best time, when the government is
starting off. There are two or three areas,
administrative reforms of a particular type, and
there are some budgetary allocations that can
signal that these are very very critical for the long
term.”
In summary, I don’t think 5.5-6 per cent fiscal deficit is going to
matter much. If it goes beyond that, issues will arise because that
will set off expectations of massive increase in taxes because
expenditure commitments are not going to be seen as being
politically manageable in the future. And that is the kind of
expectations that we do not need at this point. So fiscal
conservatism in terms of sticking to 5.5-6 per cent is I think
desirable. But to talk about 3 per cent fiscal deficit, I think can
wait.
Barua: I am not suggesting that fiscal deficit should come down
dramatically to 3 per cent this year and 2.5 per cent next year. I
was suggesting that if you look at the expectations building up in
the financial market, there seem to be expectations of more
stimuli, which could take the deficit up beyond 6.5–7 per cent. I am
comfortable with 5.5 per cent and a clear roadmap of bringing it
down in the future.
Sen: I think setting timelines for bringing down fiscal deficit is
dangerous at this point in time if you are managing expectations…
Barua: The absence of timelines could be equally dangerous…
Omkar Goswami: One has to understand what the Congress
thinks its mandate was. I think the overwhelming consensus is that
their mandate was inclusive growth. This mandate involves looking
at significant increase in social sector programmes and social
infrastructure. There is of course the issue of how well that can be
implemented. But a necessary condition is that, both within the
Centre, and from the states, funding is made available.
Also, for creating better physical infrastructure in
upcountry India. The Bharat Nirman programme,

unfortunately, came to an abrupt halt in the middle of the last UPA
regime. Even if 50 per cent of that huge programme could be
implemented, it will cause a fundamental face change in rural
India. That’s the mandate of this government. The mandate is not
to ensure that the denizens of south Bombay, looking at
Bloomberg terminals, remain incessantly happy.
If the government is clever, in order to execute the primary
mandate, they will realise the need of finances and there are limits
to which money can be raised by way of public sector borrowings.
Therefore, you do need FDI going forward, and you need to do
things that keep the capital market and investors happy.
You need to look at the budget — and the next one as well —
within that framework. The government will do the things that are
needed to be done in terms of inclusive growth in order to ensure
that this translates to a much larger number of seats in the next
elections.
I don’t expect a fourth stimulus package. We are on a turnaround. I
expect significantly large social sector spending. Go through the
seven bullet-heads of the Bharat Nirman Programme and you
know exactly where the monies are going to go. I expect some
disinvestment signals.
My guess is that the finance minister is going to come up with a
target for the remaining period of 2009-10 of something like Rs
15,000 crore to Rs 20,000 crore from disinvestment.
I agree on FRBM with Pronab. Whether today or three or four
years down the line, talk is cheap. To commit to FRBM when three
things fall in place. One, if all your assumptions on denominator
buoyancy happens. It happens because your real GDP growth
goes up, you have just the right kind of inflation to create a large,
nominal GDP growth, and as long as your numerator increases at
a rate lower than the denominator, that buoyancy takes you to
some sort of FRBM target.
Second, when you start reducing significantly the rate of growth of
the numerator. That is not going to happen. Because public
expenditure is going to be the leitmotif of this government.
Number three method is if you can rationalise taxes. And I believe
that is the way to go. In addition to the divestment schemes, you

got to stop exemption schemes as you go along, you have got to
get the corporate sector’s average taxes today from 22 per cent or
so to somewhere near 30 per cent. Will the finance minister do this
today? No. Too early. You have got to build political consensus.
I would actually look, not at this budget — this budget is much
more of a signalling budget — I would look at the next budget to
see if he is serious about a) growth, and b) the deficits and the
rationalisation. I would agree that we are looking at no less than
5.5 and probably around 6 per cent as the Centre’s fiscal deficit.
Datta: What about FDI reforms?
Goswami: I am sure he will signal insurance (relaxation of FDI). It
is in the Rajya Sabha, so there is no problem. I am almost certain
he is going to signal pension reforms. But I don’t think he is going
to make the case for FDI in retail.
Bhandari: This will be a cautious budget, but at the same time
some tough decisions will have to be taken. And this is the best
time when the government is starting off. There are two or three
areas — administrative reforms of a particular type, and there are
some budgetary allocations that can signal that… these are very,
very critical for the long term. I would agree with Omkar that we will
see some minor action, some signaling of FDI… insurance of
course, definitely not in retail.
Goswami: Don’t be too hopeful about 3G spectrum in the short
run. The persona of the minister and very quick, efficient,
transparent allocation of the 3G spectrum seem to be antithetical
to each other. So, I don’t expect a large amount of money coming
through 3G spectrum in this fiscal.
Rajeev Dubey: From all the discussion, there is this sense that the
government is almost dismissive of fiscal prudence. But do you
think that the stimulus packages have had any effect?
Bhandari: I think that the stimulus package has worked on the
monetary policy front. On the fiscal end, I don’t think it has.
Barua: I think the pay hikes of the government employees came in
handy, and that combined with lower rates of leverage, for
borrowing, the reduced rates for the retail borrower has actually
helped some segments — like the passenger cars, for instance.

So one could make the case that both the pay hike as well as the
rural loan waiver, which was really a default stimuli has been far
more effective than the excise cuts. If you look at the excise cuts
and the prices, the prices were cut and then they moved up again.
So I would say the excise cuts didn’t help…
Sen: First of all, the smoke and mirrors bit. If you really look at the
stimulus packages, other than tax cuts, everything else was
bringing in on paper what was done in actuality much before. If my
problem is not the consumer, then a tax cut does not have a lot of
effect anyway.
STIMULUS PACKAGE
“I think that the stimulus package has worked on the monetary policy
front. But on the fiscal end, I don’t think it has.”
LAVEESH BHANDARI
“If you really look at the stimulus packages, other than tax cuts,
everything else was bringing in on paper what was done in actuality
much before.”
PRONAB SEN
“The pay hikes of the government employees combined with lower rates
of leverage, for borrowing, the reduced rates for the retail borrower
have helped.”
ABHEEK BARUA
This is why we really need to look at the budget differently. The tax
cut, we should not have expected it to have any effect, except for a
psychological one, which it did. So, in the budget, do you need to
keep that tax cut? The logic of economics says it is not necessary.
The logic of expectation management says it may be a good idea.
Barua: Dr Sen — you do have the expenditure side of the
breakdown of the GDP. In the case of the car market, was it
getting into a bit of a problem before the pay hikes kicked in?
Sen: There was certainly a problem but that problem emanated
from the financing side, and not from the desire side. Prices were
off. It’s just that you were not getting finance. And that is much
more of a monetary phenomenon…

Goswami: It is an interesting point. If investments need to come
back in a big way, the people who invest, that is the businessmen,
have a great deal of say in tax policy — particularly in rebates on
investment, in tax holidays on investments. So, the pressure is
going to be intense on the North Block to maintain and indeed
increase tax holidays for investments.
Datta: Do you all agree that the finance minister has limited
leeway in making substantive reforms in taxes in this budget or
even in the next few?
Sen: So far as any significant tax reforms are concerned, there are
two kinds of situations when you can do them. Number one is
when you are in a crisis and everyone knows you are in a crisis.
The other is when you have spent enough time in building
consensus. The only discussion that has taken place in terms of
consensus building is to move to the GST. And that is not
something that can be announced in this budget. For nothing else
have you had any consensus building of any kind. So, I just
couldn’t see any tax reform happening. The only moot question is
whether you are going to increase the roll back on excise and if so,
to what extent.
Dubey: Are we as a nation already beginning to rejoice a
recovery? When you are saying that advanced tax collections are
stagnant and industrial production has just turned from negative to
positive, isn’t it too early to celebrate?
Barua: I have serious issues with some of the government macro
data that comes out. But clearly you see that there are
expectations of a recovery. In terms of hard numbers, except for a
couple of markets, things are still very sluggish. The credit market
is very sluggish. Perhaps you can say we are on the cusp of a
recovery. It is too early to rejoice.
I think in order to sustain growth at 7.5-8 per cent, because of the
context — we are talking too much of the nitty-gritty fiscal issues.
Going forward, one of the problems I see is that perhaps because
of the crisis in the global economy, we may have learnt the wrong
lessons.
For example, sub-prime has become a dirty word. Asset-backed
securitisation has also become a dirty word. For the growth of
economy and penetration of credit, going forward would involve

lending more and more to riskier borrowers, and we need to put in
place the right systems which will curb the banking system from a
very sharp unwinding of risks. These are things we need to look at.
I feel, talking to people in the RBI, that we have become a little too
careful. There are a number of institutional issues that are beyond
strictly the fiscal domain that will determine the growth rate. We
need to take a very serious look at these issues…
Sen: I completely agree with you. I think we are learning the wrong
set of lessons, especially in asset-backed securitisation. We have
taken baby steps, and now we have completely withdrawn, which
is the wrong thing to do.
The one that we are not backtracking on is universal banking, and
this surprises me. In the US, when they repealed the Glass-
Steagal Act and brought in universal banking, they did it as a
conscious measure. In India, we followed that example through the
back door. There were no change in our banking laws, but we
forced our banks to become universal banks. It’s terribly
dangerous. Now, this may not be a budgetary issue, but it certainly
needs to be brought out in budgetary discussions. At the end of
the day, this is not something that RBI can do. Legislative action
has to come from the finance ministry.
Bhandari: I don’t think anyone can argue against this point. The
budget also sets a direction — sends signals. And there are
decisions where one should start building a consensus on.
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(Businessworld Issue Dated 7-13 July 2009)