Indian budget 2009-2010

The Indian budget announced by stand-in Finance Minister Pranab Mukherjee who is also External Affairs Minister, for the fiscal year 2009-10 would have many a developed country drooling over its state of the economy and growth forecasts for the forthcoming fiscal year.
Past Pakistani economic managers, if they are in the mood for introspection and an unbiased analysis of their own performance would, no doubt, feel not only envious of India's achievements; but also ashamed of how our rival left us far behind in the economic arena even at a time when the world was prospering and Pakistan registering high growth rates.
It is India's achievements in the field of economics that is considered by many an analyst as the main source of India's rising international clout - clout evident given the frequent mention of the potential of India's large middle class as a market for western products in the international media.
So what exactly are these statistics? First, GDP growth rate of 7.5 percent, 9.5 percent, 9.7 percent, and 9 percent from fiscal years 2004-05 to 2007-08. Comparable growth rates in Pakistan as per the Economic Survey were: 9 percent, 5.8 percent, 6.8 percent and provisional estimate of 5.8 percent in 2007-08. In other words Musharraf's economic managers mantra that during their tenure the country experienced high growth rates must be seen in the context of India's economic performance during the comparable period.
Musharraf's dwindling acolytes may well quote Bush from three years ago as the reason for Pakistan's poor performance even at a time when the floodgates of concessional aid were open to us post 9/11: "Pakistan and India are different countries with different needs and different histories." And this remark, though it angered the Pakistani public and media at the time, remains valid.
While both Pakistan and India have high corruption levels, though we have been able to beat India in terms of scoring higher on the Corruption Index compiled by international institutions yet the major difference is three fold: (i) India has remained a democracy since its independence excepting a brief period of emergency during which time the government remained under civilian control.
In contrast, the role of the Pakistan army has remained pervasive not only in Pakistani politics but also in our economy even during times of civilian rule. (ii) Indian judiciary has remained independent of the executive and has, as a consequence, strengthened its institutions. This has also spread the perception amongst businessmen, local and foreign, that justice is accessible - a fact that accounts for large foreign investment inflow into India.
Pakistan's military and civilian rulers, in contrast, continue to show a partiality for a judiciary subordinate to their dictates. And (iii) the Indian government's five year economic plans encapsulated a vision for the future from which politicians did not deviate. In Pakistan, in contrast, five-year plans were rarely followed which may well account for the appalling literacy rates, low outlay on education and health - trends that continue to this day.
Thus, during the last four years of Musharraf the Pakistan government failed to take advantage of a favourable international investment climate as well as to channel massive aid injections to this country to the deficient physical (read energy) and social infrastructure (education and health) sectors in marked contrast to India. The reason may be found in the fact that Musharraf did not want to rock the boat as far as the economy was concerned and more specifically in terms of (i) not changing expenditure priorities from the past which did not take account of the changing ground realities, for example the brewing energy crisis; and (ii) backing off from taxing those who were supporting his government.
In terms of fiscal policy the two countries took different decisions that accounts for Pakistan's current economic impasse. Tax to Gross Domestic Product (GDP) ratio for India was 9.2 percent in 2003-04 while in Pakistan it was comparable at around 9 percent in 2004-05. By 2007-08 India had upped the tax to GDP ratio to 12.5 percent which, according to the Finance Minister in his budget speech, brought India "within striking distance of the target for fiscal correction. This also enhanced our capacity to raise resources internally to finance our growth at the rate of 9 percent per annum during the eleventh five-year plan."
In contrast Pakistan's tax-GDP ratio was 9.6 percent in 2007-08. Shaukat Tarin, Advisor to PM on Finance has underlined the need for enhancing tax to GDP ratio to 18 to 20 percent to achieve 7 to 8 percent growth in the economy - considered to be a wish at this point as it does not reflect any policy announcement in this regard.
The current tax-GDP ratio is simply too low to finance Pakistan's desired spending levels as well as control the persistent budget deficit. Tarin has stated the government will request the International Monetary Fund (IMF) to increase its support for Pakistan by over 4 billion dollars, reflecting paucity of domestic tax and non-tax revenue collections for the current year, while no effort has yet been made to bring the sacred cows into the tax net.
Focus, as per the government's Letter of Intent (LoI), submitted to the IMF Board for formal approval of the 7.6 billion dollar standby arrangement, is on (i) eliminating subsidies (oil subsidies have already been eliminated and food subsidies have been dramatically reduced). This reduction, one would assume, would be much greater than the other condition in the LoI namely to place a comprehensive and well targeted social safety net, (ii) integration of income and sales tax administration with obvious implications for (iii) audit reintroduction and (iv) full VAT with minimal exceptions.
India in contrast used high growth of the 2000's to its long term economic stabilisation: Finance Minister Mukherjee in his budget speech added that "during this period the fiscal deficit came down from 4.5 percent in 2003-04 to 2.7 percent in 2007-08 and the revenue deficit declined from 3.6 percent to 1.1 percent." But with international oil and food prices rising in 2007-08 coupled with an impending election the government of Pakistan's subsidy erased all previous gains largely attributed to the heavy inflow of foreign assistance. True, but India, like the rest of the world, was also subject to the same prices.
Mukherjee in his budget speech stated that "the sharp rise in global inflation, even with a moderated passthrough, put pressure on domestic prices. The WPI headline inflation shot up to nearly 13 percent in the first week of August 2008. To ease supply side constraints, Government took a series of fiscal and administrative measures, in concert with monetary policy measures by the Reserve Bank of India.
RBI raised interest rates to mop up excess liquidity. This in turn had implications for the growth rate from the demand as well as the supply side. These, along with easing global price pressures, led to a decline in domestic prices with inflation rate falling to 4.4 percent on January 31 2009. We have weathered the crisis" but he added: "there is no room for complacency."
One must contrast this state of affairs with what happened in Pakistan. The State Bank of Pakistan, in spite of measures to combat inflation, failed to come up with a monetary policy formula that controlled the inflation rate and it requested IMF monitoring to force the Ministry of Finance to desist from borrowing irresponsibly from the SBP. In other words Pakistan remains far from the position where anyone can declare that have 'weathered the storm.'
(This is Part 1 of a two-part series contrasting India's economic performance and budgetary policies as contained in the budget speech of Mukherjee with Pakistan's experience.)