Oil prices could make or break this year's Budget
By Swapan Dasgupta
Finance Ministers are not astrologers. Nor for that matter are the economists on whose inputs Finance Ministers bank on—although large numbers do well crafting beguiling econometric models that supposedly anticipate future trends. As such, Pranab Mukherjee was wise to seek the blessings of Indra and Lakshmi for a Budget based on the gamble that India will witness a 9.5 per cent GDP growth in 2011. If the gamble succeeds, all will be well. But if the Indian economy underperforms, this year's Union Budget of 2011 will come to be seen as a piece of wilful deception by a beleaguered UPA.
For Mukherjee and his economist Prime Minister it may not suffice to propitiate Indra and Lakshmi only. The Hindu pantheon is not short of deities for all occasions. Unfortunately, it has no god and goddess controlling the one thing that could make or break the Budget and, indeed, the Government: oil prices.
The Hindu faith being inherently non-dogmatic and eminently pragmatic, some theological improvisation is always possible to cater to contemporary exigencies—the ancient Romans revelled in additions to the pantheon—but the pran sthapana should have been a consideration the day Tahrir Square became the newest icon of the Arab world. Secular India, it would seem, needlessly delayed its divine obligations.
It is not that North Block was caught totally unawares by the creeping sense of alarm in the financial world. Last week, as the demented Colonel Muammar Gaddafi threatened his own people gunfire and damnation, the price of oil touched $114 per barrel, a 64 per cent jump from May 2010. If, in addition to Libya and Bahrain, the Jasmine Revolution triggers upheavals and uncertainty in other countries of West Asia and even Iran, the price is expected to cross $120, sending the world economy into a tizzy. Even if regimes are not toppled, vulnerable sheikhs and Ayatollahs may decide that raising oil prices is the easiest way of placating a restive citizenry with freebies, to compensate for the lack of personal and political freedoms.
The impact of a steep oil price hike on an oil-importing economy is potentially devastating. In a scary article in Financial Times last week, Martin Wolf summarised its potential consequences vividly: "it transfers income from consumers to producers; it lowers overall spending, as consumers normally cut their spending more quickly than producers increase theirs; it shifts spending away from other goods and services; …it raises the price level; it lowers real wages and the profitability of energy-using industries; and it reduces supply as capacity becomes uneconomic." Wolf also ominously noted that each of the past five global slowdowns had been preceded by sharp rises in oil prices.
On Budget day, even those economists supportive of Mukherjee's attempt to control the fiscal deficit admitted that all calculations could go awry if oil prices crossed $120. Yet, putting his faith in the ultimate benevolence of the known Gods, Mukherjee chose to ignore the distant thunder. Yet, the mere fact that he consciously departed from National Advisory Council-speak and stressed the importance of pending reforms suggests that saner minds in the Government realise the need to bolster India's economic defences against the unexpected.
"The bomber", Stanley Baldwin used to admit fatalistically during the rearmament debates of the 1930s, "will always get through." By that same logic, India cannot entirely insulate itself from the dark forces. The Government has admitted its helplessness against inflation—although the Prime Minister insists that all will be well, soon. It has decided that the EMI-paying classes with housing, car and education loans no longer need to be insulated from high interest rates. At the same time, it has banked on a spurt in manufacturing and services and the Laffer curve to generate the necessary wealth for the non-aam aadmi to pay for the sharp increases in the prices of food, healthcare, petrol and cooking gas. And it has reposed faith in the Adhar-led direct cash transfers to Below Poverty Line families to tangibly demonstrate the munificence of a 'pro-poor' administration to the voting classes.
Politically speaking, Mukherjee has engaged in shrewd packaging. Buffeted by pressure from Corporate India for purposeful reforms and from the Sonia Gandhi-led NAC for even more generous welfare hand-outs, he has tried to show he has accommodated everyone. If there is a visible tilt, it is in favour of the wealth creators: the proposed expenditure on the non-audited Mahatma Gandhi National Rural Employment Generation scheme has actually been lowered from Rs 40,100 crore to Rs 40,000.
In the context of the state's move from occupying the commanding heights to becoming a gigantic welfare agency, this symbolic snub to a flagship programme created by Sonia Gandhi is telling. For the first time, the Government (and particularly a Congress-led Government) seems to be taking some interest in the quality and effectiveness of government expenditure on welfare. The Economic Survey endorsed a study that suggested that 18.2 per cent of rice and a staggering 67 per cent of wheat supplied to the Public Distribution Scheme is diverted to the open market and sold at higher prices. The stylistically elegant and erudite Economic Survey was understandably more circumspect in its assessment of the MGNREG scheme—it didn't allude to studies that indicate horrifying misappropriation—but its understated conclusion said it all: "there is scope for improvements like shifting to permanent asset creation and infrastructure building activities, reducing transaction costs, better monitoring, and extension to urban areas."
More telling, its observation that "For India to develop faster and do better as an economy, it is…important to foster the culture of honesty and trustworthiness. Thanks to the fact of this social prerequisite of economic development remaining unrecognized for a very long time, this has not received adequate attention…" Rarely has an official document said so much by saying so little.
The champions of inclusive development appear to have put their faith in Nandan Nilekani devising a secure system of identification and verification. But whereas the Unique Identity Device and direct cash transfers will help minimise corruption and even promote a degree of efficiency, it will not be able to cope with the resistance the Government is certain to confront in moving from universal to targeted subsidies, particularly in fertilisers. It is doubtful if the UPA Government will be able to cope with the farmer backlash once the new proposal for channelling fertiliser and even kerosene subsidies become operational. Like tax-free agriculture, the subsidy raj has become far too much of an entitlement to be rationalised in the lifetime of one Budget.
As someone attempting, however tentatively, to put good economics into the realm of good governance, Mukhejee could do with all the luck he can muster. But what if the Arab thirst for change turns out to be relentless and forces oil prices northwards? The UPA has approached for this exigency in the same way as Britain and France prepared for Hitler's aggressive designs prior to September 1939: through a gamut of less than half-measures and the hope that the danger will pass.
If the danger doesn't pass, the Government will be forced into exercising harsh options. Lower GDP growth, the return of the fiscal deficit and more stealth taxes are only to be expected. But if India is to come of any crisis with its fundamentals intact, the political class must acknowledge an elementary rule of household income: that expenditure cannot wildly exceed income. The Government is spending beyond its means and replacing a failed socialist model with a discarded Scandinavian one.