INDIA’S SHIFT IN POLICY: Budget 2009

India’s Union budget 2009 represents a discernible shift to the left by India’s Congress party following its election win in May. Budgets in India are much more than statements of financial accounts. They are important pronouncements on the political economy of one of the world’s fastest growing countries.

Union budget presented by 73-year-old Finance Minister Pranab Mukherjee was no different as he sought to confront major challenges in reviving India’s sagging economy.
It is, not surprisingly, a continuation of the Congress party-led government’s left-of-centre, pro-poor and populist policies.

So the bulk of the money to fund all this will come from printing currency and borrowing from India’s central bank. There is also an implicit assumption that some money – nearly $10bn – will be raised by auctioning electromagnetic spectrum for telecommunications and divesting minority government holdings in state-run companies.

There will be a sharp rise in deficit financing to pay for welfare schemes such as the landmark jobs-for-work programme – which has seen a near 150% rise – in the villages and social security schemes for unorganised workers.

On budget day, the Sensex tanked 869 points and gilt yields rose 30 basis points. The markets seemed to be repelled by Pranab Mukherjee’s budget. In fact, the budget does a good job of dealing with a Great Recession. That is a substantial achievement, notwithstanding some confused thinking and lousy presentation.

The markets skyrocketed 20% after the Congress election victory, thinking UPA-II would go for radical economic reform to celebrate independence from the Left Front. This was irrational exuberance. A party that has achieved 9% GDP growth and won re-election will naturally opt for continuity, not radical reform.

Mukherjee has opted for continued emphasis on the aam admi, infrastructure, anti-poverty spending, social spending and agriculture. Why change a winning formula? Congress is intrinsically left of centre, so it’s logical for UPA-II to opt for Common Minimum Programme-II.

Markets are dismayed by the rise in the fiscal deficit to 6.8% of GDP, up from 5.5% in the interim budget in February. Add state deficits of 4% plus extra oil and fertiliser subsidies if their global prices rise, and the total fiscal deficit may be 11-12% of GDP.

Until the 1970s, the ruling Congress party was perceived as a left-of-centre party espousing socialist rhetoric under the then Prime Minister Indira Gandhi.
In the early 1990s, the Indian government’s economic policies became more market-friendly and outward looking.