Budget Day Blues

Budget day is near. I am blue. This is because the global economy has been going through a bad period since early last year. We have inflation in western developed economies – the US, UK, EU, etc. China is slowing down and many emerging economies are caught in a debt trap. Energy prices have risen in NATO countries since last February when Russia launched an attack on Ukraine. There is no peace in sight, nor any easing for energy prices, except for India which has worked out a deal with Russia. But, even so, India is not immune from global shocks. 

India has been performing creditably, and every day we hear about its fifth rank in global GDP. Remembering that is for total and not per capita income, we can see that the status of a middle income country, let alone a high income country, is going to take more than wishful thinking.

India has always had flashes of good performance with false dawns. Yet except for the period 1991-2016, India has not had another five- or ten-year run of sustained high growth in its 75 years of existence. The first 40-odd years, 1947-89, were wasted in pursuing capital intensive manufacturing under public sector, trashing of the private sector, enacting labour laws to make labour expensive and neglect of agriculture. No wonder the economy crashed and India had to pledge its gold reserves.

Success as a Service Economy

The success when it came relied on export of one commodity that India has exported for 300 years -- labour. This was in 1990s, when India succeeded in exporting skilled labour online, without anyone moving home. Even though the manufacturing illusion still survives (under various slogans), India has succeeded as a service economy. Over the last six years, the pandemic discounting, India has been a success story of ecommerce, fintech and digitisation. 

Let me simplify the India success story. India has roughly 20 per cent seriously rich, 40 per cent middle income and 40 per cent at the back of the queue. But the 20 per cent means 200 million-plus consumers, three times as large as UK. The global economy has noticed this, so FDI is pouring into India, especially now that China is emitting red signals. This is what explains the unicorns. There is a lesson to be learned here. 

India does not need to make its own goods. As long as it has good infrastructure and a reasonably well working government in the major sectors of the economy, it can import manufactures, export skilled labour and make itself a seriously rich country.

Lack of Fiscal Prudence

The key to this is fiscal prudence. This is very difficult in Indian politics at Union and state levels because the 40 per cent at the bottom (who vote regularly) require fiscal support via various schemes. These schemes are increasing, not diminishing at any level. Even excluding the various concessions to OBCs and other groups, the Government of India behaves like a welfare state for its own employees at all levels. OROP, or one rank, one pension, is a prime example of an unfunded pension scheme which is hard now to reform as it involves the armed forces. Various other pension schemes are also similarly unfunded. It would be a great achievement if the FM got experts to produce a report on the true state of Indian public finances. The UK has an Office of Budget Responsibility to scrutinise the Budget independently. India should contemplate such a measure. But that is a utopian wish.

There is no chance that the government salaries and pensions will ever be monitored for their long-run fiscal fitness. The farmers’ movement proved that expensive privileges will be fiercely guarded in India, no matter which party is in power.

The answer is to be realistic, admit that the deficits will persist and let the exchange rate take the strain. The cost of a depreciated exchange rate will fall principally on the top 20 per cent.

The better long-term answer for India to achieve top status is to look at East Asian countries and copy them. Japan, not China, should be India’s role model. The Japanese model is to bring together political leaders and big business to chart a national strategy for continued growth.

It is forgotten now that India had a vibrant private sector with a world-class textile industry. It was the seventh largest industrial sector. Then came Independence and a slew of misguided policies.

India suffered from the delusion of socialism; not as a programme for equality but for a prejudice against the private sector. Nehru thought profit was a dirty word. The most socialist moment of Indira Gandhi’s reign was the nationalisation of commercial banks which led to Himalayas of NPAs. These NPAs are the deficits generated by misguided socialism, which nurtured crony capitalists.

What needs to be done?

South Korea, which was ruled by Japan as a colony, followed the Japanese model which allowed it to jump from a per capita income lower than India in 1950 to currently, an income of a multiple of more than 20 times. Taiwan, Singapore, Vietnam, Cambodia have all done it since the oil shock of 1973. India failed to be part of the Asian miracle because of its delusions of socialism. 

India has to play to its strength. It has to regain its position as a successful capitalist economy which it was for decades before Independence. Its success since 1991 was based solidly on youth, education and skills despite no government plan to do so. Time has come for India to shed its delusions of sticking to failed ideologies and join the dynamic prospect of rapid growth. 

Desai is a well-known British economist and former Labour politician

Meghnad Desai

Guest Author Desai is a leading economist and author