Budget disappoints think tanks, but for different reasons

Experts say finance minister performed a sterling task in reducing expenditure, but most thought the Budget did not do enough

In what has become, almost, a post-Budget tradition in New Delhi, the heads of five of the city’s most eminent think tanks came together on stage on Saturday to put the Budget’s proposals in perspective, and to work out what they mean for the direction of reform and for India’s development.
 
One of things that they agreed on was that Finance Minister P Chidambaram has performed a sterling task in reducing expenditure in financial year 2012-13. Tapas Sen of the National Institute of Public Finance and Policy listed the various acts of expenditure compression in this year’s Budget, though some questions from the floor suggested that greater clarity as to how those compression choices were made is needed.
 
The other question that was raised was whether India is, in fact, at the brink of a balance-of-payments disaster. Rajat Kathuria of Icrier explained how the economy had reached a level of external vulnerability not seen for over two decades, and then said that the Budget had done very little to correct it. When a poll was taken of those attending as to whether a crisis was likely within the next year or two, opinions were split evenly between those who thought it likely and those who did not.
 
From the questions as well as the speakers’ addresses, it seemed that most thought the Budget did not do enough. Why it did not, however, was answered in different ways. Shubhashis Gangopadhyay of IDF emphasised that much of what needed to be done to restore investment, create jobs and so on was outside the realm of the finance ministry. Kathuria agreed, saying that “the Budget can only do so much”. Beyond that, the states also need to do their part.
 
Shekhar Shah of NCAER pointed out that the Budget could, at least, create headwinds in a particular policy direction – but if there were any such created by this Budget, he added, they were in the direction of economic populism and not reform. Much work that could have been done to revive the manufacturing sector, for example, had been left undone.
 
In response to a question from a finance ministry official as to what one or two measures should have been in the Budget but were not, Gangopadhyay made an interesting point. It was not about one or two measures, he said; policy makers should outgrow doing strength-weakness-opportunity-threat tests on policy changes. Instead they should think in “general equilibrium” terms, recognising that every component of policy affects every other component, and make consistent changes across a large swathe of policy areas. At the very least, the Budget should be “a statement of consistency”, he argued. However, instead of setting out a new policy direction, he said he feared that the “holding pattern” of the UPA years was continuing – a tendency towards permitting crony capitalism while simultaneously setting up transfers that prevent discontent from growing too much.
 
Speaking last, Pratap Bhanu Mehta of the Centre for Policy Research made the point that much had not been talked about in the Budget: inflation; industrial policy; and above all, state capacity. Economic reform, he said, would not work without sustained investment in state capacity – but that seemed something that this Budget had completely avoided thinking about.