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For a Little Bit of Bloomin’ Luck! Omkar Goswami
By his own admission, Major Jaswant Singh, once of the Central India Horses, professed to know little about economics, and had only a passing familiarity with macroeconomic and fiscal figures. On several occasions during his stint as the Finance Minister, Singh would preface his speeches with an admission that he was neither an economist and nor did he know anything about the subject. In fact, he treated economists as an arcane ambidextrous bunch, who not only spoke a strange unintelligible language but also specialised in giving “On the one hand… But, on the other” policy options. Singh’s predecessor at the North Block, the workmanlike Mr. Yashwant Sinha, spent long hours understanding economics and pored over numbers to fashion five successive budgets. The first was a bit of a disaster; the second average; the third and fourth were pretty good; and the fifth was also a creditable effort, except that it rankled industrialists and the capital market-wallahs enough to mount pressure upon the BJP to do the Raisina Hill switch — when Yashwant went South and Jaswant moved North. Unfortunately, however hard Sinha worked and how so ever good his budgets might have been, he didn’t have the luck. For three of the five years when he was in the Finance Ministry, the Indian economy grew by less than six per cent — and two of these posted less than five per cent. Do as he possibly could, Sinha just couldn’t get the country’s GDP growth to touch the seven per cent mark. In addition, he got buffeted by myriad financial sector problems, of which the worst was the dismal collapse of UTI. Fiscal historians will judge Sinha’s Union Budgets of 2000-01 and 2001-02 well. Contemporary records were far harsher — all because he didn’t have the requisite dose of good fortune. Being a military man, Jaswant Singh knew the importance of Napoleon’s adage of being a lucky general. And despite his self-admitted lack of knowledge and interest in economics, this big picture foreign policy man had the luck of the devil. Although Singh entered the North Block when the country was in the throes of a terrible drought, he was fortunate to be at the fiscal helm when the economy started a major pickup. Call it a statistical illusion or what you will, the fact is that after Jaswant’s first full budget in February 2003, the country achieved 8.2 per cent GDP growth — the fastest since the advent of economic reforms and, more important, the second highest growth rate in the world among large economies. For the first time in several years, the ratios of fiscal and revenue deficits to GDP were less than budgeted; tax revenues were on the up; UTI was sorted out; and the RBI’s coffers were brimming with almost $120 billion. India may not have shone enough for the NDA to come back into power the second time around, but the performance certainly repositioned the nation smack in the centre of the international radar screen. Jaswant Singh was no a master of empirical economics, finance and fiscal policy in the mould of a Dr. Manmohan Singh or a Gordon Brown. Instead, he was blessed by dollops of luck. It was as if a substitute was asked to field at first slip and, in the very fist ball, the snick from the opposition’s best batsman unerringly carried to his palms and got stuck. Right time, right place… and the rest was history. Good luck is something that Mr. P. Chidambaram needs in huge measure. In his first innings at the North Block, he wasn’t very lucky. If you will recollect, his second “dream budget” that all of us praised for the right reasons budget got badly unstuck with a sluggish economy that could achieve only 4.8 per cent GDP growth in 1997-98 — which was a far cry from the 7.8 per cent growth attained in the previous year. The threat of a repeat performance dogs Mr. Chidambaram this time around. Nobody with a sane mind will doubt the present Finance Minister’s commitment to economic reforms in the widest sense of the term. None will deny his tremendous knowledge of the minutiae of fiscal policy. And many will agree that he is one of the most knowledgeable Finance Ministers in the last three decades — perhaps second only to Dr. Manmohan Singh. Most of us want him to succeed. Yet, I fear that the economic performance of 2004-05 may play spoil sport. Here are my three concerns. First, economic growth. In my previous article, I had predicated something between 4.9 per cent to 5.2 per cent. Despite the welcome late rain, I see nothing yet to revise the growth estimate to anything above 5.2 per cent. Even if growth were a bit higher — something around 5.5 to 5.7 per cent — it would still not be good enough to achieve Mr. Chidambaram’s fiscal and revenue deficit targets. I reckon that at the end of the day, the fiscal deficit would be around Rs.150,000 crore, or 4.9 per cent of GDP. That isn’t terrible, per se; but it would be worse than the 4.4 per cent budgeted for 2004-05. Second, despite there seeming to be excess liquidity in the system, interest rates have begun to harden. With WPI inflation exceeding 7 per cent — and an average inflation of over 6 per cent for 2004-05 — the only way nominal interest rates can go is northward. And if the revenue deficit widens, as it might, then one could expect a further hardening of rates because of rising yields on one-year government securities. Third, there is the issue of crazy oil prices. These days, Brent crude quotes at $44 per barrel. Few expect this to fall significantly below $40 over the next couple of months. At these prices, Mr. Chidambaram will have to significantly reduce the customs duty on crude not only to ease inflationary pressures, but also to cap the huge and growing oil pool deficit. That, in turn, would reduce customs revenue and increase the overall budget deficit. In such a milieu, Mr. Chidambaram may be remembering the cameo performance of Stanley Holloway as Alfred P. Doolittle in My Fair Lady, when he sang: “Oh, for a little bit, for a little bit, for a little bit of bloomin’ luck!” Here’s to a lot of it…
Published: Financial Express, August 2004
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