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Straight from the Specialists

Budget 2013: Reduce fiscal deficit, make poor richer

By Andrew Freris
February 20, 2013

(Any opinions expressed here are those of the author and not of Reuters)

A lot of expectations are riding on this year’s budget. And it’s not difficult to see why.

The last 18 months or so have been poor for the Indian economy with decelerating growth and a relatively weak currency reflecting the widening current account deficit. The persistence of inflation had kept the RBI on hold and this did not help the stock market. Financial scandals and seeming political indecision as far as deregulating the economy, at least till recently, were not conducive to confidence.

The budget, which authorities promise will deal with the issues of fiscal deficit and of the role of state spending in fostering growth, is bound to raise expectations which may not be fully met. Politics is the art of the possible and not necessarily of the desirable.

A key issue which has bedevilled Indian fiscal policies has been the redistributive role of the budget, in using fiscal resources to address poverty. In other words, reduction of subsidies, be they in cooking fuel or rail fares hits the brick wall of the objection that this would hurt the poor. Unfortunately this gets hold of the wrong end of the stick. Woody Allen memorably remarked that “poor people are poor because they do not have money”.

In other words, poverty alleviation has been repeatedly shown not to work by providing “cheap” food, fuel instead of ensuring high levels of employment, rising productivity and real jobs which would provide the poor with real incomes. There is, of course, the added issue in India of the reportedly extremely bad performance of state distribution of food, most of which was lost in corruption. In other words even where the state meant well, the outcome was not the one expected.

And herein lies a very painful and near intractable conundrum. Cutting subsidies and spending the money instead on infrastructure investment which will generate incomes and jobs, creates an immediate decrease in the spending power of the recipients of the subsidised items in return of longer term expectations of meaningful and improving jobs. Hence the desire to avoid this short-versus-long term trade-off by keeping the subsidies going as the key anti-poverty weapon.

Deregulating sectors of the economy can be equally painful as, despite public statements to the contrary, no one wants or likes competition. The case of retail distribution in India is here relevant whereby the interests of a few hundred thousand small store owners are pitched against the interests of millions of consumers who are bound to benefit by cheaper and more efficient distribution of large scale retailers, be they Indian or foreign.

Last but not least, there is the issue of fiscal deficit which imposes on the Indian state a burden of interest payments which on occasion took more than 20 percent of all fiscal revenues. No one here seems to have complained that resources which should be going to the “poor” went to undeserving bankers (actually overwhelmingly Indian banks, they being the main lenders to the government). Hence any attempt to reduce the deficit so as to dedicate non-loan fiscal resources to create jobs for the poor, will hit objections that cutting the deficit will hurt the poor.

A final comment, always in the context of the budget, is the perennial question of corruption. Wealthy countries such as Japan or the United States can easily afford financial scandals involving the state and its finances. Poor countries, such as India, cannot. Again it is slightly strange that the swell against corruption in India was far more focused on the political and moral issues rather than the fact that stealing government resources steals from the poor.

If the Feb. 28 budget goes directly for the painful issues of reducing the fiscal deficit and directing resources towards making the poor richer, then it would be a “game changer” budget ushering a much more encouraging period for the Indian economy and for its poor.

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