India's cycle of crisis and reform is predictable as clockwork. Ever since it faced a balance of payments crisis in 1981, the country has found itself in some macroeconomic trouble at the start of every decade. This, in turn, has pushed its reactive policy makers into reform mode.
The same pattern has been at play over the past year, with the economy slowing sharply to 5%, inflation stubbornly high at 10% and the fiscal and current account deficits widening sharply. The threat last summer of India's sovereign rating being downgraded to junk status finally galvanized policy makers into taking some corrective measures. They liberalized foreign investment in retail and airlines, and took aim at the subsidy system.
Finance Minister Palaniappan Chidambaram's budget speech Thursday was expected to further confirm these newfound reformist urges. Unfortunately, it failed to bolster the government's market-friendly credentials.
The finance minister did seem to stick to fiscal prudence by meeting a budget deficit target of 5.3% of GDP for the fiscal year that ends this March and promised to bring the number down to 4.8% in the next. However, the math involved some Robin Hood economics of soaking the rich to pay the poor. Mr. Chidambaram hiked allocations to the government's pet welfare schemes even as evidence keeps mounting that such spending is leading to higher wage inflation and lower worker productivity.
What's more discomforting is that this budget made little provision for a food security bill, which aims to provide food grains at heavily subsidized prices to more than half of India's population. If enacted as currently planned, this welfare project could cost the country far more than the $1.8 billion provided in the budget.
By Ruchir Sharma
Mr. Sharma is head of emerging markets at Morgan Stanley Investment Management and author of "Breakout Nations: In Pursuit of the Next Economic Miracles" (Norton/Allen Lane, 2012).