Budget 2012: Will the FM think long-term for a change?

India is a long-term growth story. It has a vibrant democracy, young population and the enterprise to grow. At least this is the view portrayed about India for investors whether local or foreign to encourage them to invest in the India growth story.

The Indian government, however, is definitely not in for the long term. The government believes that a series of short term steps to boost the economy and improve financial market sentiments will translate into the India long-term growth story being kept alive.

It is time for long-term steps without worrying about the short-term repercussions (which may, in fact, prove positive). The Finance Minister should take long-term steps for the economy in its budget for 2012-13, which will be presented to Parliament on 16 March.

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How short term has affected long term

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In the past, the government has taken many short-term steps that will harm the economy in the long term. The first is its inability to reduce fuel subsidies. Oil prices have risen six-fold over the past ten years and the government has actually gone back on the dismantling of the APM (administrative pricing mechanism), as it could not muster courage to effect a complete ‘pass through’ of rising oil prices.

The last Finance Minister, P Chidambaram, found an off-balance route to absorb fuel subsidies - issuing oil bonds. That is the shortest-term measure one can get as he simply put the burden of paying back those bills on our children.

The current Finance Minister, Pranab Mukerjee, told the Reserve Bank of India (RBI) to fund the government as it could not raise fuel subsidies. The RBI, in funding the government’s fiscal deficit, has increased its balance sheet by 270 percent over the last three years, threatening to send inflation out of control.

Inflation has been trending at over 9 percent over the last couple of years, much above the low-single digit levels seen in the first half of the past decade. In fact, the RBI has been proudly stating that low inflation in the early 2000s was due to the end of ad-hoc financing it used to provide to the government in the late 1990s and getting the government access the market to fund its deficit.

The farm loan waiver credited to P Chidambaram is another short-term measure that has led to long-term pain. The farm loan waiver caused a hole in the government’s finances of Rs 65,000 crore and it has turned an important sector of the country into a bad lending proposition. Loans are meant to be defaulted is the mantra of farmers as seen by the losses suffered by the micro-finance companies such as SKS Microfinance.

Power, an important sector for the long-term health of the country, is in dire need of reforms. The losses suffered by state distributors of power are affecting production and distribution, causing lenders’ balance sheets to weaken and sending power prices shooting up for consumers.

The reduction of taxes, spending on rural employment and now a food security bill are all short-term measures guaranteed to bring down the country in the long term. A fiscally constrained government cannot reduce taxes, and if it does, it leads to inflation as the RBI funds the government’s deficit.

NREGA has also led to wage rates rising across the agricultural sector leading to rise in food production costs and creating a spiraling inflation effect. The food security bill will lead to a sharp rise in food prices as the government ensures sufficient stock to store in inefficient storage facilities for providing food security.

We all know what the government needs to do for the long term: reduce subsidies, improve agricultural efficiencies and carry out key reforms in important sectors. However, we all know that this will not happen, as short term is more important than long term for the government.

Hopefully, Pranab-da will surprise us this time around.

Arjun Parthasarathy is editor of www.investorsareidiots.com, a web site for investors.