The state election results surprised many. This column predicted that in 60% of states, incumbents that accelerated GDP growth would win. That model proved right in Punjab, Manipur and Uttarakhand – 60% of cases! The prediction for Uttarakhand was that the BJP would lose, and it has certainly lost seats and dropped to no. 2.
Earlier, analysts expected a tough budget, curbing populist giveaways and the fiscal deficit. They reasoned that the last full budget before the 2014 general election would be in 2013, which would therefore be a populist election budget. Hence, they argued, Pranab Mukherjee would treat Budget 2012 as his last chance to put his financial house in order. But the state election results have endangered the UPA government in New Delhi. Pessimists say it will fall in a few months.
This is far from certain. Yet precautionary realpolitik may induce Pranab Mukherjee to treat Budget 2012 as an election budget, just in case it is the government\’s last before the next election. If so, it will be full of subsidies and giveaways. Instead of honest accounting, it will use smoke and mirrors to cloak the runaway fiscal consequences.
Most observers thought the Congress Party and Samajwadi Party would form the next UP government, with the SP joining the UPA coalition in New Delhi. The SP\’s 22 seats in Parliament would have assured the UPA a majority in the Lok Sabha, checkmating the ability of the mercurial Mamata Banerjee, with 19 seats, to topple the coalition.
After sweeping the West Bengal polls, Mamata challenged the government on the Teesta waters agreement with Bangladesh, the rise in petrol prices, foreign investment in multibrand retail, and the Lokpal Bill. Why did she risk the government falling? Because if this led to an early parliamentary election, she expected to increase her seat tally from 19 to 30-32. On the other hand, if she waited for the next parliamentary election as scheduled in mid-2014, her seat tally might suffer as anti-incumbency set in.
The same logic now applies to the SP too. If an early parliamentary election is held, it can build on the big success it has gained in the assembly elections, and increase its tally to king-making levels. If it waits till May 2014, it too could suffer from anti-incumbency.
TMC minister Dinesh Trivedi made this point after the election. However, he was asked to retract by Mamata – she said she did not favour immediate parliamentary elections. Yet that does not guarantee the government\’s safety. Her moods are mercurial, and she is quite capable of withdrawing support without warning if her every wish is not granted.
Can the Congress deal with the possibility that both Mamata and the SP will turn against it on one issue or another? Yes, it can achieve safety by roping in Mayawati\’s BSP as a partner in New Delhi, something advocated strongly by Union steel minister Beni Prasad Verma. Having lost comprehensively in Uttar Pradesh, Mayawati may feel she can check a vendetta by the new state government if she has the protection of the UPA government in New Delhi. The test of this may come in Uttarakhand, where both the Congress and BJP would like the support of the BSP to form the next state government.
So, the outlook remains murky. Maybe the UPA government will last a full term, maybe not. But the uncertainties are so great that a tough budget will entail huge political risks, and Pranab Mukherjee is by temperament not a risk taker. He keeps stressing the need to take others along.
A tough budget would partly decontrol fuel and fertilizer prices, allowing these to rise in line with global rates. This is extremely desirable on pure economic grounds. The fertilizer subsidy threatens to cross Rs 100,000 crore per year, and the subsidy for fuels could cross Rs 150,000 crore per year if current global trends continue. Checking these subsidies is essential for cutting the fiscal deficit to reasonable levels.
But any attempt to sharply raise fuel or fertilizer prices will create a political uproar. Mamata and the SP will join other opposition parties in paralysing Parliament, demanding a price rollback. Sonia Gandhi and Pranab Mukherjee would like to avoid such a situation.
Back in 2008, the government risked parliamentary defeat on the Indo-US nuclear deal: it thought its case was strong enough to take to the people in a general election. But will Sonia Gandhi risk going to the polls on the issue of raising petrol, diesel and fertilizer prices? Not a chance.
So the chances of a populist budget have risen hugely. Whether economists and stock markets like it or not, fiscal prudence is not going to be a high political priority.