Monday, March 03, 2008

Lalunomics much better than Chidambaram's nothingness

I follow and wait for India's budget with great enthusiasm, expecting great strides forward from a person who once delivered the so-called "dream budget" way back in 1997. Mr. Chidambaram in his second coming has been really disappointing, to an extent probably undone by the expectations people may have unrealistically had from him, given his self-acknowledged "limited mandate" that the UPA government to govern the nation. His budgets, apart from incrementally expanding the net of service tax wider, have brought little cheer to the markets - fringe benefit taxes, cash transaction tax and short-term capital gains taxes have all been bad news.

While there is nothing wrong for politicians to pander to the electorate, there is a big difference between what is just bad economics to what is really poor foresight and government policy. Waiving off farmer loans worth Rs. 60,000 crores (about USD 15 billion) is not just not enough, is a step in the wrong direction that will do little to stop farmer suicides or change anything that is systemically wrong with Indian agriculture. Most Indian farmers turn to the local village moneylender when in need of money and many suicides happen because of the illegal money lender's crushing interest rates and farmers' illiteracy and ignorance of better options. Waiving off loans en masse sets a very wrong precedent - something future governments will find hard to overturn when faced with similar difficulties (which they will because the current loan waiver will hardly make an impact on farmer suicides). Minimum support prices, waiving off farmer loans, subsidies on electricity, diesel, fertilizer and seeds are all attempts to do something visible, but hardly effective in the long run to solve farmers' problems.

What the farmers, urban poor and indeed, even the ultra rich need is not the crumbs our government is happy to throw at them. What is needed is a social security net that gives them the confidence to take business risks and invest in the crops that are likely to give them the best returns. There are financial tools markets provide to ensure returns are safeguarded - be it crop insurance, commodity futures etc., there are ways in which farmers can avoid ending up penniless. That such institutional mechanisms exist in India today but continue to be legislated against is an example of misplaced priorities and lack of understanding of how free market, if given a chance, could have protected small and marginal farmers instead of ruining them.

This budget was regressive, though it was only aiming to be populist and pander to UPA's electorate in next year's elections. It did give the salaried class a big tax break, and while we should thank Mr. Chidambaram for it, in view of the sixth pay commission that should be submitting its recommendations soon (which the government will be forced to accept, given it is an election year) this break was probably unnecessary. Three new IITs is probably a good thing, but it is a good time to question if higher education (esp. institutes of excellence such as the IITs and IIMs) should be in the public sector at all. A whole lot of money has also been allocated for primary education, which is good.

On the other hand, while the finance budget was almost all negative (a 2 out of 10 from me), the railway budget was impressive, forward-looking and quite revolutionary in some ways. Green lavatories, internet, new trains, rationalization of freight rates and passenger fares, higher allocations for safety, investments for metro rail systems are all great news and will go a long way. When Lalu took over the Railway Ministry, a lot of the "educated elite" had very low expectations, some of us thought he will convert the Railways into another Bihar. He has not just proved us wrong, he has gone ahead and done something revolutionary and quite unexpected - taking advantage of simple operations management techniques to boost profitability. No wonder that Lalu got a pat on the back from RSS who thought he was UPA's best performing minister. I thought so too, and so did a lot of people.

For this budget, and for good economics throughout his tenure, I would give Lalu an 8 on 10. The big reason why he doesn't get more is because the logical next step is to privatize Indian Railways, which is one step he would never take, given his stated political positions.

Lalu's success may have been because of the relatively freer reign he may have got thanks to his political clout. Chidambaram, on the other hand, was not in Congress in 2004 and almost lost out on the job also because DMK did not want him to get it. His appointment may have been the only time our Prime Minister displayed some assertiveness, but it was probably a bad bargain in the end. It may have been much better for the nation if he had bargained for some good economics and some good sense in return for a lesser qualified Finance Minister.

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