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Subir Roy: What about fiscal consolidation?

Subir Roy 

Subir Roy

Over the last few years I have discovered that the best way to know whether the is headed in the wrong direction is not by looking at a clutch of economic indicators, but whether on my twice-a-week shopping expeditions I find an unseasonable rise in the prices of fresh vegetables. The word "fresh" is important, as - unlike perishables - onions and potatoes can be stored and their prices manipulated by traders, big and small.

Kolkata and its environs, from where the city gets its fresh vegetables, have had normal rainfall this year, unlike many other parts of the country. So vegetable crops - which are of short duration - should at the moment be normal, and their prices similarly so. The only reason why such prices should instead be unseasonably high is if inflationary expectations among vegetable growers and traders cause it to be so. If so, then there shall not just be but general inflation, too - and this will augur ill for the overall


This brings us to the Union Budget, which has both pluses and minuses. Among the latter is its inability to read the riot act on inflation, a key reason why the previous government lost so heavily. A government with a comfortable majority that rode to power on the economic mismanagement of the previous one should logically have asked the people to bear with it for a year or two (pre-Budget references to "bitter pills" seemed to do so) until the economy's fundamentals were set right.

Instead the Budget has lowered the income tax burden for most. What is worse, that emperor of maladies - the subsidy bill - has been left untouched. Consequently, the fiscal deficit has been projected to remain precisely where had said it would, as if he is the intellectual guru (maybe he is) of budget-framing and whom a greenhorn such as Arun Jaitley dare not challenge. Mr Jaitley could, of course, say that it was not really his Budget, but that of his prime minister - however, that will only make things worse.

As is well known, an inability to be seen to be trying to restore fiscal discipline and being on an upward path again (the latest figures show is down, but prices are up!) will make it that much more difficult for the Reserve Bank of India to lower interest rates. If that does not happen soon, business confidence will wane, losing the buoyancy that it had quickly acquired on seeing a favourable electoral outcome and the likelihood of business-friendly policies. Instead, what we have is people-friendly (read populist) policies - with key assembly elections round the corner.

The government is trying to be business-friendly, but in a way that can be harmful. The makes a strong case for re-examining free-trade agreements (FTAs). An important reason is the inverted duty structure (lower import duty for finished products than that for components) that it has created. But there is an easy way out - bring down the duty on components to lower than that for finished products. Why? Because having low import duties is intrinsically good. If third-party (say, one between Thailand and China when India has one with Thailand but not with China) are a nuisance, then there are two ways out. Have more FTAs, or become more serious about concluding the Doha round of global trade negotiations.

If there are a couple of policies that, along with the end of industrial licensing, played a key role in enabling the Indian to forge ahead, they were gradual trade liberalisation and the introduction of market-determined exchange rates. These forced Indian industry to become competitive - and every time high brought down the rupee and the media sighted an apocalypse round the corner, exports surged and the day was saved.

It is too early to fear that seeking to revise will be the thin end of the wedge that will seriously injure the trade liberalisation achieved in the last two decades, or even create a temporary halt. But it is important to reiterate the commitment to trade liberalisation even while announcing the desire to revise so that wrong signals are not sent.

Businessmen love low import duties on their inputs and high duties on their outputs. And the Bharatiya Janata Party has a keen ear for business sentiment. It is doubtful if trade liberalisation would have taken place to the extent it has had not the reins of power at crucial junctures been in the hands of Manmohan Singh and P V Narasimha Rao. Global financial liberalisation may have gone too far - but not trade liberalisation. Jagdish Bhagwati, who should be regularly mentoring the present government, should tell it not to go against the grain of his lifetime's work.

subirkroy@gmail.com

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