"For 240 years it's been a terrible mistake to bet against America, and now is no time to start". Warren Buffett's annual letter to shareholders of Berkshire Hathaway, out on Saturday, is as buoyant as ever. You would be surprised to think that he is talking about the same country where politicians are falling over each other in an election year to point out how badly it is doing (and how only they can fix it, as Buffett observes, wryly). The Octogenarian, in his 52nd year at the helm of investment company Berkshire Hathaway, subscribes to the same formula that that has given him a more than impressive 20% compounded return since he began in 1965 - Invest in good companies and stay put, irrespective of business cycles.
Turn to India, and the Annus Horribilis that 2016 is turning out to be. The stock market is on tenterhooks; the economy is crawling; and the political leadership appears to be demented. And that is just putting it mildly. It took a mere announcement that the Finance Minister would be meeting investors ahead of the budget for Dalal Street to abandon its pretence of a rebound. The bond markets interpreted that as a sign that the Minister would go back on his promise to keep fiscal deficit to 3.5% of the GDP, and explain himself to the economists, and reacted badly. The experts on TV have even longer faces than is usual, as they predict how dire the straits are.
Today's budget is being seen as the last chance to bring the economy back on track. But is it really a make or break year? Or in other words, can we have a budget that misses all its marks, and still go back and invest?
For starts, let's look at the Fiscal Deficit, the single most anticipated figure, and in all probability the decider of whether the budget will get a thumbs-up or not. If Jaitley brings it down to 3.5%, there will be fireworks. If he doesn't, he'll be accused of profligacy. But you know what, it doesn't matter. The Fiscal Responsibility and Budget Management Act, 2003 was brought in to bring the Fiscal Deficit to a manageable (and according to economists worldwide, a respectable) 3% by 2007-08, and maintain it thereafter. Since 2008, India has never once adhered to the target, thanks to a global financial crisis, two sets of election sops, and now another global crisis in the offing.
Did the skies fall, as it is now fashionable to ask? Hell, no! In fact we managed a strong recovery in the interim, with the Sensex increasing four-fold before the recent tumble. The deficit is as good a line in the sand as any, and perhaps more importantly, adhering to a target just for the sake of it does not serve any useful purpose (except give the Ratings agencies a reference to judge). The UPA government consistently missed targets, and compensated by promising better ones the next year, and there is no reason why Mr Jaitley should not travel that path, given that the economy does indeed appear to be hobbling.
The Economic Survey released on Friday has already revised growth estimates downward. And that is surely a bummer: everybody loves growth. But spare a look at the historical data for China's growth, and go back a few decades. Every five years or so, China has dipped to growth in the range of 7%, and sometimes even lesser, without losing the ability to bounce back, as if on cue, after cooling down. In the medium term, the economy will certainly recover its mojo.
A timeline for the Goods and Services Tax would be certainly welcome, and indeed, if implemented, will go a long way in reducing costs and increasing jobs, but again, let's not kid ourselves that that will be the defining reform announcement of the budget speech. Bank Balance Sheets will have to be strengthened, and that will most certainly have to be provided for. Probably the only surprise will be the depth of the wound. Tax limits for individuals may or may not be raised and corporates can most certainly expect an unpleasant surprise on the tax front. But the silver lining is, if you jog your memory just a little bit, these were all (except, maybe the bank bailouts) the same issues that dominated the fear-list last year. And the year before that. And the one before that.
Now, just to clarify, the argument here is not that all of these are irrelevant to the India growth story. Rather, they will be mere footnotes to the Long term India growth story. So let's not get carried away by a 90 minute speech in late February and pretend that the ghosts of the future have shown themselves. A positive announcement could turn out to be just a damp squib (do read the Statement of Implementation of Budget Announcements of the previous year - You'll find that surprisingly little has been actually implemented).
So what is it that one must really watch out for in the budget?
If the last few weeks are anything to go by, it is becoming abundantly clear that the chickens of unemployment are coming home to roost. As the demand for caste based reservations take root, and turn violent, the Government can hardly afford to offer a few sops and look the other way. As long as the Supreme Court refuses to budge on the 50% upper limit on quotas, any further reservation will only add to discontent in the country. What the government can do, and should, is create jobs and develop skills. Make in India is surely a step in the right direction.
But announcements don't make jobs, and it is of utmost importance that the Government is perceived to have a grip on the issue. A civil unrest by those with everything to lose could quickly mothball into a fire that cannot be put out without substantial damage. And that is the real economic risk facing India.
Guest Author
The author is an Advocate, practicing in Delhi, and a Chartered Accountant
