Aforesaid budget documents have interesting messages to convey on the overall health of economy.  However, it would be more interesting to analyze all these documents together for what they mean for India and more specifically for Bihar. In undertaking such an analysis, it becomes important to read these documents in conjunction with each other than in isolation.

General budget of this year has been designed to convey that the economy is in dire straight. Accordingly, the running theme through this budget has been adhering to overall fiscal prudence.  There can be no quarrel with this prognosis and also the thrust of the prescription. But the question arises as to what brought the Indian economy down to its knees. It is the governments own action over the lifetime of UPA I and UPA II. They completely undid the magnificent work done by the preceding government. When NDA demitted office, financial conditions were in pink of health, as vouched by none other than the current finance minister Mr Chidambaram, and economy was booming with a growth rate of 8.4%. A very firm foundation has been laid for growth of Indian economy then which saw the country grow for next few years. Mismanagement under this government has destroyed all.  Let us examine the contrasting style of the NDA and UPA I government here:

It would be a fine November day in initial year of his term when Vajpayee suddenly announced a plan to build corridor of national highway connecting Srinagar to Kanyakumari and Veraval to Agartala. Lot of analyst questioned the move then saying it was not a well thought out move. They criticized the then PM for idle thinking without applying brains to how to fund such a mammoth plan. However, within a few months strategist in government fine tuned the vision and gave concrete shape to it. Thus, it was decided to build golden quadrilateral first and golden corridor was also scheduled for subsequent stage. This very project when kicked in 2002 becomes the flag bearer of Indian economy for next five years. There were lots of activities in other infrastructure sectors. UPA government in contrast slowed down the very NHAI projects. UPA I completely mishandled, politicized and delayed the NHDP III projects as can be verified from the fact. Moreover, UPA I delayed and actively sabotaged most other infrastructure projects for which Mr. Nitish Kumar can certainly vouch. A number of such projects ( Ordnanace Factory, Harnaut Plant, North Karanpura Power Project, Barh Phase I, Railway  Mega Bridges) have been in Bihar after all.

NDA government left the economy in pink of health on the belief that they will romp back home again. UPA I one resorted to reckless decisions in belief that they don’t stand a chance ton come back. That recklessness has now returned to haunt UPA II and most importantly this country as well.

Another thing which NDA did it right has been achieving low interest rate with low inflation rate scenario.  Government observed prudence in fiscal management and it allows it the elbow for efficient management of economy.  That bite of onion price of year 1998 lasted through their entire term with a hawk eye on food prices over the years.

Another achievement of Vajpayee government was creating an economy of surplus.  I remember that even gas connections with double cylinders were available on demand then. Same was discontinued by UPA in its very first year.

Reason for success of NDA and Failure of UPA can be explained as follows:

• NDA government was a well governed with head of government having control over all his faculties.  Ministers were not allowed to work at cross purposes unlike UPA government.
• NDA government followed the key principles of economics well where as UPA has turned the same over its head:
• Resources are limited hence spend them for maximum marginal utility. NDA did it whereas UPA was profligate. Example is MNREGA, which is good in intent but bad in structure and implementation. Ownership of workforce should have been bestowed in Panchayati Raj ministry, payment in Finance ministry and work program in work ministries like rural development, irrigation road railways, forest and agriculture etc. Prsent design of bestowing all ownership in single rural development ministry has been a recipe for disaster.
• Structure program spending and projects to optimize economic value creation. Disbanding freight equalization policy and introducing pit head power project policy exemplified the same. UPA has again going the reverse way in resorting to price pooling and allocation coal projects to power projects located further away from the pit top..
• Target spending in creating maximum multiplier effect. Accordingly increasing infrastructure spending.
• Moved to lower interest rate as overarching policy to make more projects and investment opportunities viable and reduce government liabilities as well.
• Increase supply side to moderate inflation even with lower interest rate scenario in line with Philips curve.
• Bring in policy and program clarity and start implementation. Check individual discretion in policy making.
• Inter-ministerial coherence and checking of instances of working at cross purposes.
• Check instances of moral turpitude and moral hazard in functioning of government. The way loan waiver was implemented in UPA I, it only created a moral hazard. Government should have structure it in a better way like interest subvention, work to pay off the loan and so on.

Moreover, India has a huge unsaturated economic potential and all the resources to support economic regeneration available internally. Solution to its economic ills lies within and not outside as is being touted by the current dispensation. Primary dependence on the world market seems to be for:

1. Fossil Fuel: government should make a concerted effort to reduce dependence of fossil fuel by replacing it with hydro electric power and other renewable energy. Concerted effort is required for the same.  Himalayas spread from Kashmir to Mayanmar has huge hydropower potential, at least three times more than the current installed capacity, but is hitherto lying unexploited. Also, dependence of gasoline can be reduced significantly by moving railways completely to electrical power and moving doing away with digisets and gensets with adequate power supply. Investment should be more in building rail network than road and migrating mass transportation to electrical powered metro, mono, cable network systems.
2. Gold: Internal demand for gold should be met by releasing governments own reserve.  Prospect of falling gold prices will also dissuade people from demanding more of this yellow metal. There is an acute need to break these insatiated demands which is being further fuelled by appreciation of its prices.

With exception of these two, India can meet all other requirements internally through enabling policies. India’s predicament is not the same as other economies which are having development saturation and have also been seeing aging of their population. So, giving out such an alibi subsumes that India has met fully its internal consumption demand and is dependent on world economy to consume its goods and services. Or, it requires precious foreign resources to buy in certain things requirement of which can not be locally met. Growth starved foreign companies will definitely be keen on leveraging there technology to help India even in this dire economic scenario. In fact, Indian private sector is quite capable to acquire such technologies for India with an enabling framework.  Past problem has been over reliance on public sector undertakings which were inefficient by their very organizational design.

So, good thing about this budget is its thrust on fiscal management. If a government is a bit lucky with the same, inflation will move down and interest rate will ease up. Projects will again become viable and in turn will also attract foreign capital easing up pressure on foreign currency which will then help ease up import bill and moderate current account deficit.  Flip side is that if lower interest rate does not materialize in investments quickly enough to strengthen supply side and goes into fuelling consumptions, inflation will again start moving up taking interest rate northward. Similarly, strengthening currency need to be assessed in terms of  trade off between reduce import bills and dip in exports value in dollar terms due to its becoming less price competitive in world market. So, solution does not lies in taking these measures but in translating them into desired outcomes through efficient management.

Worst thing about this budget and also the action of last year is that it continues with spending which have low economic value cutting down on investment which has high economic value. Consequently this will suppress growth rate reducing potential of buoyancy in revenue. This in turn will put pressure on government revenues feeding into fiscal deficit even further. Finance minister has failed in restructuring government spending to create optimal economic value and multiplier effect. This should be our big worry.

Tragedy is that everyone in the key position in government is aware about these finer aspects of our economy and aforesaid cause and effect models. However, it seems that they are tied down by some invisible power from making the right decisions. Helplessness and desperation is evident when I see Dr Raghuram Rajan, Dr Montek Singh Ahaluwalia, Dr C Rangarajan, Mr Chidambaram and even Dr Manmohan Singh talking on these issues. Perhaps they are made dumb by the presiding deities of congress party and fellow cohorts in alliance parties. I would like to borrow from the lexicon of Mr Nitish Kumar to describe the state of affair in the country today that is “Problem is not the bad governance but complete lack of governance. It is evident that this government has become simply Dysfunctional. It is not taking any decision not to mention the right ones”. Dr Manmohan Singh has become Mrs Rabri Devi of India. Dark Age of Bihar is over but it seems India has descended into one.

contd...