Post Budget: A New Paradigm

Market Maniac

Budget 2010 went far beyond most recent budgets in that it defined an entirely new paradigm for the Indian economy. The most important part of the Budget was the Economic Survey, which, more than simply providing the conceptual underpinnings for the budget, is the document that describes the government’s thoughts and beliefs. It tells us who our government is.

And this year’s Economic Survey was a revelation, particularly Chapter 2, which is titled the Micro-foundations of Inclusive Growth. It acknowledges the key goal of inclusive growth and, remarkably, asserts that we need a new paradigm of an enabling government, as opposed to an intrusive one. Indeed, the Finance Minister, in his budget speech, reiterated this point.

The Economic Survey differentiates between the two as follows:

“In many poor nations the Government takes the stance that, when in doubt about the goodness or badness of two or more adults voluntarily conducting an exchange, stop them. An enabling state, on the contrary, takes the view that when in doubt, do not interfere. There are, of course, many actions of individuals and groups that will need to be stopped for the welfare of society at large. But the default option of an enabling state is to allow rather than stop, to permit instead of prevent.”

This is the Government of India speaking, boys and girls. Are you ready?

Let the market rule, with openhearted and open-minded regulators; government should only directly service those who have not yet “arrived” in an economic sense.

Simple, obvious, straightforward – nobody, but the now dying Left, would disagree.

And while it may take a few years for this vision to fully fructify into a reality, it seems clear that the government has – finally – understood how strong it really is. Note, for instance, how the well-timed nod to Mamata and the sops to West Bengal will continue to increase pressure on the decaying windpipe of the Left parties. Again, note how the Finance Minister swiftly pushed the nutrient-based subsidy scheme as a first step of transformation of the fertilizer policy through the screaming jaws of both the Fertilizer Minister and none other than the heretofore-frightening Minister of Food & Civil Supplies. Hopefully, this will translate to greater determination by the Congress government in Maharashtra.

In any event, the government is just beginning to feel its oats, as they say. And as we have all known for years, getting India to rock is no rocket science – the only thing lacking has been political will.

With the government charged up, several of the excellent (and obvious) plans that have been gathering dust are beginning to see the light of day – clever incentives to get the State governments to go along with articulated needs; funding local bodies independently of the State governments to accelerate change at local levels; UID-driven food coupons for BPL families, cash payments to poor farmers to both promote inclusive growth and reduce the subsidy bill; co-coordinated focus on agriculture through improved infrastructure, better focused nutrients, and research; and so on.

Of course, the devil is in the implementation, which has long been our second Achilles’ heel. I have little doubt the government is aware of this – the fact that armies of mid-level bureaucrats and regulators still live in the old world, where, contrary to the new dispensation, if there was no clear answer, the answer was “No”. Many bureaucrats and regulators still believe it is their job to micromanage: At a recent seminar, a mid-level executive at SEBI asked whether currency options should be designed based on the spot or the futures rate. When I asked him why he was even thinking about it since product design should be the job of the exchanges, his face showed complete consternation.

Clearly, the government needs to undertake a massive retraining program to ensure that entrenched processes don’t derail the bigger plan.

But the overall energy is extremely positive. The middle class is on side with lower taxes in this time of high food inflation; the corporate sector has got away without any real damage; the domestic economy is getting fully engaged again; and even global growth appears to be showing some signs of life. Sure, there could be a relapse globally, but RBI and the government have proved their mettle during the last crisis.

I believe it is time. Our new paradigm can take us quickly on to a virtuous cycle of strong growth – inclusive, of course – and deficit reduction.

Perhaps this will be India’s century, after all.