International instability apart, even on the domestic front Singh is clearly in no hurry to get down to the business of implementing the politically costly second generation reforms — that is structural reforms, increase in user charges, freeing the rural sector, labour reforms and power reforms among others — as these do away permanently with special advantages to specific groups. To undertake these reforms, the government has to convince the people that any losses in the short run will be made up for by long-term gains. But as experience with the Kelkar recommendations has shown, this is easier said than done. The fact that raising the lower limit of taxable income would offset any losses accruing from an abolition of exemptions was lost in the din of panic reactions that followed the announcement of the Kelkar report.

With the gods of statistics on his side, Singh certainly deserves a round of applause, and not only because no one expected to hear good news at a time when the global economy has little to celebrate. Consider the following:

• According to the Business Confidence Survey for October-December 2002, corporate India is optimistic about the prospects of the economy and expects better performance in the next six months. While 71 per cent of the 521 companies surveyed felt that the economic conditions were "moderately to substantially better" as compared to the last six months, over 60 per cent said that the economy would perform better in the next six months.

• Despite a slowdown in global IT spend, software and service exports from India generated a revenue of Rs 34,000 crore in April-December 2002, up 28 per cent from Rs 26,600 crore in the corresponding period of the previous year, according to figures released by the National Association of Software Service Companies (NASSCOM).

• Data released by the Central Statistical Organisation (CSO) shows that industrial production recorded a growth rate of 5.3 per cent during April-December 2002, a figure which is more than double the growth rate of 2.5 per cent registered during the same period in 2001.

• According to a government statement, Indian merchandise exports rose 34.3 per cent in December to $4.365 billion from $3.250 billion in the same month in 2001. Although it is improbable that this growth rate could be sustained, experts agree that the government’s target of 12 per cent growth for 2002-03 will almost certainly be bettered.

• Trade deficit for April-December 2002 was down to $5.77 billion, 13.18 per cent lower than the figure of $6.64 billion a year ago.

• According to the RBI, at present India’s foreign exchange reserves stand at a record $73.2 billion, a fact that was reflected in Moody’s upgrade of India’s foreign currency rating to Ba1 from Ba2 earlier this month.

• Tax collection rose by 15.26 per cent to Rs 161,450 crore in the current fiscal.

• According to data made available by the Government of India, fiscal deficit was down to Rs 86,269 crore in April-December 2002, a 1.3 per cent decline from Rs 89,014 crore recorded in the corresponding period of the previous year.

• The services sector recorded a growth rate of 7.5 per cent in the first half of the current fiscal year against 5.5 per cent during the same period in 2001-02.

If you think this is too good to be true, you may be right. It’s time for a reality check. Having inherited a growth rate of 5.4 per cent in 2001-02, it was a case of champagne corks being popped a tad too early for those who celebrated an unexpected revival of the economy last year. In September last, soon after a downward revision of the growth rate of the economy to 5 per cent by the International Monetary Fund (IMF) for 2002-03, the National Council of Applied Economic Research (NCAER) said that the overall Gross Domestic Product (GDP) growth was projected at 4.8 per cent, a decline of 0.7 per cent from the growth it had projected earlier in June. Latest reports by the Centre for Monitoring Indian Economy (CMIE) term the CSO’s, and the government’s, projected growth rate of 4.4 per cent for the same period as ‘optimistic’ and say the GDP growth is likely to be closer to 3.7 per cent. However, in all fairness one has to concede that the reason for this was not a drop in industrial production but a slowdown in agricultural output as a result of a poor monsoon. According to the CSO, agricultural growth went down to 2.5 per cent in April-September 2002, from 3.3 per cent in the same period in 2001. Another possible source of worry for Singh is likely to be the inflation rate which stands at a two-year high of 4.86 per cent. The possibility of a war in Iraq has pushed up prices in the global crude market and this has, in turn, resulted in an increase in the domestic prices of petrol and diesel.

The fact that the Finance Minister chose to abolish the customary pre-Budget meetings this year can be interpreted as a signal from him to not expect any drastic measures on February 28. With the electorate waiting to deliver the verdict in state-level elections this year, with the general election soon to follow, Singh is expected to play it safe. Sticky subjects like tax on agricultural income or cut in subsidies are not likely to be tackled because that would erode the rural vote bank. Similarly, a removal of exemptions in personal or corporate tax is not expected to be touched upon, because after all you can’t afford to alienate the middle class or the trading lobby. Tax incentives on small savings, tax breaks for housing and infrastructure will, in all probability, continue. However, tax on dividends and long-term capital gains may go, a measure that will again be aimed at appeasing the electorate.

Vote-bank politics apart, it is undeniable that as compared to first generation reforms, second generation reforms are more painful and time consuming. The effects of liberalisation and deregulation, which constitute first generation reforms, are immediate, highly visible and benefit almost everyone through lower tax rates, more free markets or less red-tapism, for example. These also elicit a favourable reaction from the man on the street because one, these are immediately obvious, and, two, these reduce the size and scope of the state and do away with protectionism, thus providing him with freedom of enterprise. Moreover, these are successful in giving the initial ‘push’ to the economy. Compare this with second generation reforms which almost always involve the slower and more unpopular structural reforms. Giving companies the freedom to hire and fire, increasing user charges of subsidised services such as electricity and water or privatising public sector organisations are bound to draw adverse reactions from sections which will have to bear the cost of these changes. It is also more difficult to maintain the growth rate that resulted form the initial ‘kickstart’ to the economy than it is to achieve the high rate of growth that goes hand-in-hand with deregulation. Then again, many of these reforms have nothing to do with the Centre, they are state subjects. Deregulation of agriculture, water and electricity charges, roads, ports and urban development, all depend on states. To undertake reforms in any of these sectors requires the sort of cooperation between the Centre and states that our tantrum-throwing states will not be willing to extend. Quite simply, second generation reforms often move beyond the ambit of the Finance Ministry, and thus beyond the sole control of the Finance Minister. These are also no longer just an economic exercise and increasingly take on political hues. That the Centre acknowledged the role of the states in the next phase of reforms was obvious in a recent statement by Federal Minister for Disinvestment, Communications and IT Arun Shourie favouring incentives for states undertaking reform.

Second generation reforms mainly aim at improving social conditions, making the economy stable and increasing the country’s competitiveness in the international arena. An achievement of these aims is inextricably linked with investment in core sectors like infrastructure, healthcare, education, transport, irrigation, sanitation, and other public services. The trouble with such investment is that its returns are visible only in the long run. There are no immediate benefits. To begin with, it only serves to increase the outflow from the government coffers, and thus makes the government’s income-expenditure statement look unbalanced, certainly not the kind of predicament any government would fancy itself in. Moreover, there is always the danger that when the benefits of the investment do start accruing, another government might be in power. It may be too optimistic to expect a coalition with disparate interests to have the kind of political will or consensus necessary to implement such reforms.

To achieve the target of 8 per cent growth that the industry said it expected, the economic policy has to be geared towards boosting demand, stimulating growth and making the country more competitive in the international arena, especially vis-à-vis China. Infrastructure development has to figure prominently in government schemes. Private participation in infrastructure has to, therefore, be encouraged. Incentives like tax holidays (which are already in place) are not likely to do the trick since these only maximise returns but do not reduce the risks associated with such investment. Structural reforms like labour reforms and power sector reforms are needed to reduce risks and make such investment more attractive. The tax regime needs to be modified to reduce barriers to internal trade and integrate the country into one frictionless, seamless market, a measure which will help maximise the contribution of internal trade to the Gross National Product (GNP). For this an across-the-board implementation of Value Added Tax (VAT), and later CENVAT, needs to be undertaken, although it is doubtful if any such recommendation will be made in this Budget. Such a step is bound to draw protests form states which stand to lose sales tax revenue under the VAT regime.

Although much misunderstood, the Kelkar recommendations would make tax collection more predictable and certain, something the government sorely needs if it is to make fiscal deficit projections which are not wide off the mark, as is usually the case.

Jaswant Singh might have learned from his predecessors’ experience that promising the moon in the Budget doesn’t help if at the end of the fiscal the government can’t deliver. Unrealistic, over-the-top projections just make the government look foolish when market forces, bad monsoon, political considerations, or lack of will to implement tough measures scale the projections down to realistic levels. And then second generation reforms often call for legislative changes, which again are silly to promise when there is a chance that these might be held up by lengthy parliamentary processes. Reforms do not begin on the last day of February. These are an ongoing process and second generation reforms call for less of rhetoric and more of nuts-and-bolts tightening. Who knows, a dull-as-doornails Budget might deliver where dream Budgets have failed. And Politicians’ Polka might be elevated to the status of an art form.