A Budget to Forget

MUMBAI, India - In the days after the Indian elections on May 16, until the finance minister’s speech on July 6, the nation discussed only one subject: the budget of the incoming government. The Congress Party, reelected to power after holding office for the past five years, had won a large enough majority of parliamentary seats to create a governing coalition free of leftists—like members of the Communist Party—who had slowed market reforms in the past. The new government, more moderate and centrist in composition than in its past term, won such a large majority, in fact, that officials promised very bold action to continue India’s economic rise.

The country’s rapid economic growth in the past decade has been fueled by a transition to the open market, and for the country to continue at this pace, it needs more open market reforms. The economy is still hampered by strict government regulation and distorted by enormous government spending, and though regulation and spending are understandable reactions to the global economic crisis of the last year, Indians were rightly expecting the continuation of the reform agenda in this year’s budget.

In India, the Congress Party’s budget announcement has come to be one of the defining moments of the fiscal year (which ends in March). In a still heavily regulated economy, government action on major economic issues can have a profound impact on the nation, attracting foreign investment and fueling rapid growth. Thus, every newspaper and television station provided special coverage on the budget for the month preceding the announcement. Publications issued countless surveys, and every business leader offered their recommendations and predictions.

When July 6 arrived, every station carried the budget address, delivered by finance minister Pranab Mukherjee. And the nation was in for quite a surprise. While Mukherjee did announce significant fiscal stimulus plans, expanding rural employment, and development programs, he did not mention any specific open-market reforms, such as raising foreign investment levels, divestment of public enterprise, or deficit reduction. After Mukherjee had signaled to the entire nation that he would follow through on these reforms, the speech was a major disappointment.

For someone offering few substantive changes, the finance minister seemed awfully proud in his speech, congratulating his party on avoiding the worst of the financial crisis. Yet, smug as he might have been, the reality is grim: According to the World Bank, in 2005 456 million Indians still lived in poverty. Mukherjee’s plans to combat this are well intentioned, but will only temporarily help to alleviate the plight of the poor. It will take the spread of private industry and finance to permanently raise their standard of living.

The government could have painlessly enabled this development of the free market through selling state-owned businesses, loosening regulations on foreign direct investment, and creating a plan to reduce the deficit. India achieved 6.7 percent growth this past fiscal year only on the back of intensive government spending by the previous Congress-led coalition. Public-sector spending provides a short-term stimulus, but a more open economy is necessary for sustainable growth.

For India’s economy to return to the 9 percent growth it enjoyed in the 2007 and 2008 fiscal years, liberalization must continue. State control over public enterprise and limits to investment still create massive inefficiencies in the economy that prevent India from realizing its full potential. The Congress Government was overwhelmingly reelected on the promise of greater reforms and more growth—and they should have followed through on those promises in the budget. Having failed to do so, they cannot delay the reforms any longer. There are a billion people who should not have to wait.


Ravi N. Mulani ’12, a Crimson editorial editor, lives in Pforzheimer House.