What the budget won’t say

There is near consensus amongst policymakers and their advisors that the economy is in for a rough ride till the end of next year. Some see it as inevitable, but I disagree. On my travels, I tend to meet two kinds of people. First, the ones who deal with billions of dollars of other people's money. They are fairly optimistic about India — it is the second fastest growing (large) economy and so on. They tend to float towards the higher end of our growth projections and are more worried about West Bengal Chief Minister Mamata Banerjee than RBI Governor D. Subbarao. But one in ten of these people, some of whom deal with large sums of money, foresee a hard landing for India. Capital protection strategies with call options — you name it, they want it.

The second lot are the financial economists. They all talk of a hard landing for India. Our own chief economic advisor, Raghuram Rajan, is a polished proponent of that school. He does, of course, speak positively about the demographic dividend, good long-term growth prospects, corruption and all that, but also points out that supply-side adjustments take time — five years at least — and that such adjustments cannot be hurried along. He comes close to saying "hard landing", even if he doesn't quite say it in so many words.

There is an alternative — the 15 per cent increase in public-private investment shows the way. Public-private partnerships are where the real choices in the policy space lie. Encouraging such partnerships in investment will put an end to "bad" expenditures. It would also lighten the impact of the decline in consumption growth this year. The bankruptcy of the leave-it-alone school when it comes to savings and investment is now evident. UPA economists followed this school of thought, only to see growth in real consumption levelling off at above the 3 per cent rate, and the great push of middle income and rural consumption growth is gone. The investment push need not be inflationary. It could be directed largely to sectors where public-private partnerships would bring in investment rather than squeeze it out.

But what about food inflation? That will remain whether the economy grows or not, as it is caused not just by supply-side factors, but also by structural problems. Food inflation is the Achilles heel of the Indian economy. If the reports so far are to be believed, it will not be addressed in the budget, which is likely to be preoccupied with side issues like FDI in retail (and not in smaller towns, which are important aggregators in the food value chain and where, according to the census, large farming populations have moved). It is unlikely that the hard landing school would design a budget that addresses the concerns of failing agricultural initiatives.

Food inflation is high in pulses, edible oils, fruits, vegetables and milk, eggs and meat, all having high income elasticities of demand. In pulses, the short-term strategy is to give price support in backward areas where they are grown. At present, the minimum support price exists only on paper, because budgetary support is not given to the procurement agencies if the loss is more than 10 per cent. PPP initiatives are also needed to expand initiatives like I-Shakti pulses but that, too, needs budgetary support. Another pressing need is to conduct research on raising yields. Take pulses. The most we can do is around a tonne and a half with our best seeds. But Australia and Canada can get two and a half tonnes, and are able to export to India. The 12th Plan statement, which suggested that only the public sector could address this, is incorrect. We need a strategic plan led by the Indian Council of Agricultural Research, but in a PPP-mould. The private sector is willing to participate, but such projects are investment-intensive and take five or more years to come to fruition, so initial support from the government is needed. Due to the present policy stance, this is not forthcoming.

Most importantly, the small towns to which 40 million farmers have moved, according to the census — the so-called census towns — should be publicly listed. We need PPPs for good bazaars, roads and agro-storage and processing infrastructure in these places. But, as discussed, the budget is unlikely to address this.

The writer is chancellor, Central University of Gujarat


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