Speech by Shri Rajeev Chandrasekhar, MP During the discussion in Parliament on Interim Budget (General) 2009-10

25 February, 2009

Sir,

Thank you for the opportunity to speak on the Interim Budget 2009.

Sir, last year you gave me an opportunity to speak in this house on the 2008-2009 budget. I characterized that budget as important because it was a transition budget to the next government. But through my speech I raised red flags of caution about this year.

Let me read out some parts of my speech.

“It is clear that certain critical parts of our economy are showing signs of a slowdown. Reports point to a slowdown becoming a slow and sure reality. The Finance Minister has said that he will keep an eye on this and take necessary action to ensure that sectors don’t go sick. I am only afraid that given the government’s general track record of responsiveness – any response will be too late to prevent an irreversible slowdown and all its attendant problems”.

I had also said “This year is a transition year and a critical year – it’s important we don’t fall off the growth track and get derailed. I remember very well what happened last time our Hon’ble Prime Minister presided over a pre-election budget in the mid 90s. Increased public spending in the face of an economic slowdown caused us to spiral into a 3 year recession. This budget from amongst all the budgets of this government – is the most risky to pull off. The weakening global economic cues and signs of our domestic slowdown in some critical areas – reinforces the view that this could turn out to be a high risk budget with consequences on the current growth strategy and slope.”

Sir, unfortunately, these red flags were to no effect – compounded by a sequence of mis-readings and mis-steps by Government, the Global credit crisis and our slow responses to them. The FRBM statements laid before the Parliament as part of the interim budget document also says “The decelerating growth phase that kicked in the second half of 2007-2008 has been continuing in 2008-2009”, establishing that we knew of this slowdown way before the global credit crisis hit.

Recent IIP data of 3.9% vs 9.2% for same period last year, points to a sharp slide in economic and industrial performance. Blue chip companies are scrambling for credit and financing. The small and medium scale and unorganized sectors are almost at standstill. The job market is crumbling and most companies could find themselves smaller next year. The Fiscal situation has caused a S&P downgrade yesterday. This picture is startling and it is clear that we are in the midst of a full-blown and escalating economic crisis.

2008/2009 is the year when our growth got derailed – The question is for how long and what costs and consequences of this derailment will be. The year can be described as consisting of the blows from the Global Credit Tsunami, Domestic monetary policy induced demand slowdown, Terror threats and the Satyam scam. Most importantly, it’s a year that has revealed that we had started believing too much of our own marketing hype – that the Indian growth formula was sustainable and continuous. That has proved to be delusional. It has laid bare the fact that exuberant public spending alone isn’t a solution, there are many more structural changes and reforms that are needed before our objectives of an inclusive economic architecture can be reached and be sustainable – It has also revealed the disruptive effect of a economic strategy that did precious little by way of structural reforms except for introduction of VAT.

The most disconcerting aspect of the current situation is the rapidity of the loss of confidence, investments and decline of the economy, as somebody said “it felt like the economy drove off a cliff”. IIP is at 3.9% against 9.2% for the same period last year! Government revenues are down 10% while spending has grown by an amazing 30%., upto Rs 9,01,000 Crores from the 7,51,000 Crores that was committed in the last budget! Finance Minister has said in his speech that we are in extra-ordinary circumstances and we need extra-ordinary measures. But the budget is silent about any response to this situation, apart from the first two stimulus packages and yesterday’s announcements of Service Tax and further Excise duty cuts. Given that the policy responses to this crisis thus far have not succeeded, it is my view that this inaction in the budget is unfortunate and will go down in history as an unfortunate and dangerous mistake – A prolonged lag in getting the economy to respond and grow again will have serious collateral damages on vast parts of our real economy – financial sector, industry, exporters etc and consequently on jobs. These are extra-ordinary times and the economy deserved more than adherence to convention, the economy deserved a real effort at stimulus. The economic cycle should not have been allowed to be hit by the political cycle.

Sir, what should we be doing?

The monetary policy tightening that caused the domestic demand erosion is no longer the issue after recent RBI moves. The current crisis has no longer a monetary policy solution. The focus has moved to the fiscal and real economy side to stop the slide and restart the economy. Let’s be clear about the definition of the problem. The problem is the death of demand, lack of credit and stalled investment flows! Sectoral stimuli packages are meaningless if they don’t catalyze these. Consumer spending will restart only if there are sharp increases in consumer disposal income and/or sharply lower prices, this will require to government to look at Direct taxation reliefs, which both the stimulus packages have not touched. These temporary direct taxation reliefs should put money in the hands of the consumers. Yesterday’s announcements by Hon’ble Finance Minister for first time take on reduction of taxes with reduction in Service Taxes and continues to nibble around the edges of Excise duties. I believe these hold some promise of restarting consumer demand.

Real economy is also currently suffering from lack of credit flow from credit markets. Despite the significant additional liquidity pumped into the Banking system by RBI, there hasn’t been a consequent increase in Credit supply from Banks. While some of this is due to risk aversion on part of banks, some of it also due to the mismatch between costs to the banks versus the required lending rates. This can easily be addressed through an interest subvention model, where 2-3% interest subsidies can be provided by the government directly. These two steps along with a concerted effort to restart investment by using MAT, Dividend distribution taxes as offset-able against investments – can form a package of real fiscal steps to steadily revive the economy.

On the more structural issues Sir, we need to ensure better Economic forecasting for the future. As I pointed out, the FRBM document itself admits that the government knew of the slowdown in the Economy way before the Global credit crisis. We can’t afford or allow missteps and misreading of the sort that happened over the last 12 months. Such missteps have a real consequence and costs on many thousands of families, jobs and many crores of investments and projects. We need new indices to measure and track Economic performance. The former finance Minister has mentioned this several times in his budget – i.e, of setting up new metrics for CPI and Inflation. This needs to be done soon, to prevent another fiasco like this one.

The incoming government must also make an effort in creating a consensus on key structural economic issues between political parties. National Economic Interest should take precedence over political interests. The primary issue is that of public spending – which has expanded significantly under this Government but with no concerted effort at measuring, improving delivery and outcomes. As Pratap Bhanu Mehta of the Center of Policy Research, said in a recent article, Inclusive growth is not just about profligate spending, but thinking about the architecture of the economy as a whole. The recent CAG report about Rs 51,000 Crores allocated to various schemes that were transferred to NGOs with no record of spending and diversion of Social and Infrastructure funds to Cultural programs are symptoms of Economic strategy that spends without focusing on outcomes and results. This is the strong reason why we should all oppose any public spending driven stimulus package of the sort suggested by many economic pundits that seem to thrive in Delhi. It will be hopelessly leaky and will not deliver on its outcomes and objectives and will only create a spurt in corruption. Sir, Delivery of our public spending and reforms of our subsidy delivery mechanism are critical as part of our Governance Reforms. Governance reforms are more difficult and time consuming and so we must start this at the earliest and given the current economic context and the uncertainties around it, this becomes even more pronounced and urgent.

Sir, let me end by saying that the challenges to kick-start our fiscally stretched and deadlocked economy are daunting. Managing an economy on a downtrend requires special grit and skills, very different from managing an up economy. The numbers of a 5.5% fiscal deficit for the coming year are not credible and will be missed by a mile and to quote S&P “India’s fiscal position has deteriorated to a level that is unsustainable”. We are currently sitting on a fiscal time bomb that threatens to unravel and wipe out the gains made by our economy over the last five years in the NDA and UPA governments. Our vision of a prosperous and India for all, can only be met if we can put the economy back on track again and do it soon.

Thank you sir.