India Budget Reax: Mo Money…

Newly elected and unburdened by clamoring communists and coalition politics, the Congress government will make bold economic reforms. At least that’s what the markets and analysts figured. All last week, the markets in India climbed up the hill in anticipation. Then on Monday came the budget speech. And the markets came tumbling after.  The reactions to India’s 2009 Budget:

Paul Beckett, in The Wall Street Journal bristles at the populism of the budget:

And then, the piece de resistance, said with a dramatic flourish: The announcement, honorable ladies and gentlemen of the Lok Sabha, that for the first time the Indian government will spend more than 10 lakh crore rupees (about $208 billion) as if that was what counted the most, not how the money would be spent or how it would be raised. Sorry, but that’s not a boast worthy of an aspiring global superpower (which India justifiably is) but of a second-tier developing nation.

From the Economic Times on why the markets reacted badly to the speech:

[Pranab Mukherjee] tried to throw goodies at everybody. Yet the stock market gave him thumbs down. Why? …largely because expectations had run very high that UPA’s first budget would outline a big vision for economic reforms of the kind the markets and foreign investors love. A big PSU divestment road map, further liberalisation of the foreign investment regime, opening up of the financial sector, etc., had been somewhat priced in by the markets…

[But]the overall perception Mr Mukherjee might have generated is one of being an old school, pre-liberalization finance minister who couldn’t care less if the government had to spend its way out of recession. Massive increases in the outlay for various social sector schemes only reinforced this impression.

The Wall Street Journal (Asia) on farm subsidies and rural programs:

The great irony is that by extending government’s influence in the agricultural sector, which employs 60% of the workforce, Delhi is only retarding its growth. India’s challenge is to move its poor from the farm to the factory. The more government shovels subsidies and free rice at farmers, the less willing they’ll be to find other means of employment.

Whoa! Dear WSJ, free rice and subsidies do not turn farmers into welfare queens. Farming is a tough occupation, nowhere is the job tougher than in India:

[Indian Farmers] are sweltering through an abnormally hot summer: India’s crucial monsoon rains are currently about 50% below requirements, raising the specter of increased malnourishment at a time when the urban economy has largely stalled as a result of the worldwide recession.

Business Week also writes of dashed expectations:

“Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed,” says Robert Prior-Wandesforde, Hong Kong-based economist for HSBC (HBC). In addition, “there is a good chance that the government will, as has often been the case in the past, undershoot its infrastructure spending commitments,” he said.

Since the purpose of the budget is to create economic growth, here is Martin Wolf, fresh from a conference on the topic, on how India can achieve affluence :

India itself must overcome three big challenges: maintaining, indeed strengthening, social cohesion at a time of economic and social upheaval; creating a competitive and innovative economy; and playing a role in its region and the world commensurate with the country’s size and rising importance. In fundamental respects, India must turn itself into a different country. [italics mine]

Seems to me this budget, despite its economic pandering, is very much focused on ensuring that the gains and the losses of growth are spread evenly. As John Lee points out, more of India’s economic progress has actually trickled down to the rural areas than in China. This is good. It creates a constituency for continued reform beyond the urban and business elites.

Increased infrastructure spending, if if the money has to be borrowed, is much needed to see rapid increase the pace of its economic progress: no “India Shining” while Mumbai is without water and Delhi without electricity.  However, the problem isn’t borrowing; it’s spending the money well. And so the big question is: can the promised infrastructure spending, rural programs and tax incentives deliver the growth that the budget wants to parcel out? We’ll just have to wait and see.