As Secretary of State Hillary Clinton has noted in advance of
her trip to India toward the end of July, the U.S. has an important
stake in Indian success. As its clout on the world stage increases,
India can play a stabilizing role in the broader Asia region,
partnering with the U.S. on a range of issues including maritime
cooperation, nuclear nonproliferation, education, science, and
defense trade. India also serves as a powerful example of a
successful democracy in the developing world.
On the economic side, unlike many of its Asian counterparts,
India is consumption-driven, not export-driven. Its growth and
greater prosperity therefore offer outstanding opportunities for
American agriculture, industry, and services.
The flip side of America's stake in India is that America loses
when India takes a step backward. And that seems to have happened
with the anxiously awaited Indian government budget for the next
fiscal year, which puts political gain over long-term economic
progress. This kind of fiscal irresponsibility may help India's
ruling Congress Party win more elections, but it will not help the
country live up to its economic promise.
Mistakenly Expecting Reform
In May, a new government won a surprisingly strong mandate in
national elections. The reaction from some of those seeking
market-oriented reform was euphoric: The Sensex Index on the Bombay
Stock Exchange rose a staggering 17 percent in one day. It peaked
at a total 28 percent gain on the 20th trading day after the
election results were announced. The broader response was more
subdued but also upbeat about reform.
But the optimism appears to have been misplaced. Prior to both
this election and the global financial crisis, the same Congress
Party led the coalition United Progressive Alliance (UPA)
government that slowed or even halted the liberalization process. This
was attributed by some to the need to placate left-wing coalition
partners, but Congress also ran on a populist platform in this
More specifically, the UPA previously ran large federal deficits
for the sake of populist programs. After taking power in the 2004
election, its first budget expanded the gross fiscal deficit 17
percent despite strong economic growth and the pronounced absence
of any need for stimulus at the time. The UPA then failed to curb
that deficit during ensuing strong years.
In that light, it should not be surprising that the deficit is
now exploding. Already hefty in the fiscal year 2007-08 budget, the
federal deficit more than doubled for 2008-09. Congress is
now arguing that the economy is doing exceptionally well, but
the government nonetheless needs to run an even bigger deficit for
the sake of stimulus. And so the deficit is to climb another 20-25
Much more likely, Congress officials assess that they won the
elections largely because of rural support programs and thus want
to continue large-scale subsidies to maintain or augment political
support. The Sensex fell 6 percent the day the budget was unveiled,
and reformers despaired at just how irresponsible the budget had
turned out to be.
Harmful Long-Term Priorities
The budget in general will have pernicious long-term effects.
The huge deficit is a heavy tax on the future that lowers India's
growth trajectory. But there are additional devils in the details,
in particular with regard to education and liberalization.
A great deal of faith has been placed in India's demographics,
i.e., that India is a young nation and will remain young over the
next several decades while the world's other large economies age.
This faith is not entirely misplaced, but a demographics-led
economic boom will not occur automatically. The swelling Indian
labor force needs productive jobs to be available--and the
education and training necessary to fill those jobs properly.
Highlights of the Indian
- Spending increases four times faster than projected GDP
- The deficit increases three times faster than projected GDP
growth, after soaring 125 percent the previous year.
- Fertilizer subsidies alone are the equivalent of almost 5
percent of the total budget.
- Subsidies for small exporters are more than three times larger
than the amount to be raised from all privatization.
- There is no change in the structure of corporate taxes.
Source: newKerala.com, "Budget of India 2009-2010:
Summary/Highlights of India General Budget 2009-10," at http://www.newkerala.com/nkfull
news-1-67991.html (July 10, 2009).
This budget does very little to facilitate that. Liberalization
is stark in its absence. A primary task in promoting long-term
economic growth is sharpening property rights. Public control of
large swaths of industry creates a situation where no one is
responsible for weakness in much of the manufacturing sector and
arbitrary government rules hamper operation of a slew of
companies. Loud talk of divestment notwithstanding,
the budget envisions raising less than $250 million from selling
down stakes in public companies despite recommendations of up to $5
In contrast, the budget boosts subsidies, worsening
government-wreaked distortions and reducing efficiency further.
There is no appreciable tax reform, either on the corporate side or
as a federal push toward harmonizing what are now divergent and
obstructive tax differences across states. Rather, Indian
states will remain separate economic entities, inhibiting economies
of scale and specialization by sector.
Regarding education, the clock is ticking. The education system
is broadly acknowledged as flawed, and India must hurry if it is to
better educate the coming influx of workers. Moreover, the stress
must be on primary education. Over one-third of Indians are
illiterate, which will eventually translate to close
to 500 million people as the population mushrooms. A demographic
expansion that adds nearly 100 million illiterate workers will not
produce the rapid economic rise so widely anticipated.
The budget, however, is overwhelmingly oriented toward current
income support. Money set aside for the national rural employment
guarantee scheme is to more than double. Other large sops include
tax breaks for the elderly and financial support for exporters.
This goes hand-in-hand with the deficit in sacrificing the future
for the present, even though education will be an even more
pressing need as time goes on.
Even within education spending, the priorities are misplaced.
The budget emphasizes higher education. There is certainly value to
a better university system, but higher education cannot possibly
accommodate the flood of young people presently in the education
system or bound for it in the next 15 years. If the government
declines to emphasize primary education, it could open the door to
the private sector. But there was no provision for that in the
budget (or elsewhere).
Suppressing the Ascent
This is only one year's budget, of course, and there is already
a campaign of reassurance that reform will come later. But the
Congress Party's credibility on this is very low. For most of this
decade, India thrived, benefiting tremendously from earlier
liberalization, which, among other things, drew large inflows of
foreign investment. Now India is heading the wrong way on the
The U.S.-India relationship is multifaceted and can certainly
thrive based on political affinity and geostrategic considerations.
But the direction that Congress has set for the past five years,
topped off by this budget, is going to slow and perhaps limit
India's ascension to a global economic force. That could limit the
value of the partnership.
Scissors, Ph.D., is Research Fellow in Asia Economic Policy in
the Asian Studies Center at The Heritage Foundation.