The Budget has been presented against a challenging macroeconomic backdrop: Manufacturing sector is losing momentum, capex is shrinking, infrastructure is in need of a big push and though inflation is moderating on the back of a high base effect, supply side constraints continue to threaten inflation. Against this background, the Finance Minister has presented a prudent and balanced Budget and has endeavoured to meet the needs of different sections, different sectors and different regions, while taking steps to revive growth and keep down the fiscal deficit.
Bank credit flow
The focus on sustainable and inclusive growth, push to manufacturing and infrastructure, banking and financial markets along with expanding opportunities for skill development is welcome. The fiscal deficit number of 5.2 per cent for FY13 and 4.8 per cent indicated for the next year reflects commitment to fiscal consolidation and will have a positive impact on interest rates, resources for productive expenditure and growth. Containing the fiscal deficit by cutting expenditure, raising taxes on the better off sections while giving relief to the small income earners, sends out a positive message to investors.
The announcements made in the Budget will see an increase in the flow of bank credit for a wide range of sectors, including agriculture, MSME, infrastructure, manufacturing, exports. Financial inclusion is set to get a further push through expansion of ATM network and insurance network in small towns. The extension of subvention for agriculture to the private sector banks, increase in target for agricultural lending, encouragement to post offices to offer banking services, efforts to expand insurance penetration and incentivising home loans by banks will keep up the buoyancy in the economy.
Credible roadmap
To incentivise household savings into financial assets, the Finance Minister has announced innovative steps such as introduction of inflation linked bonds. Other steps like setting up a Women’s Bank, allowing business correspondents to sell micro insurance, attracting new investors into the stock market will strengthen the financial sector, increase financial savings and help deepen financial markets. Incentivising infrastructure, particularly in power and roads, and reviving manufacturing investment through investment allowance will help industrial growth.
Since banks are extensively involved in lending to infrastructure, and given the growing wedge between deposit and credit growth, perhaps they could have been allowed to issue tax-free infrastructure bonds. Keeping public sector banks adequately capitalised will be a challenge so can we look forward to innovative steps like reduction in Government equity in PSBs, going forward? Keeping the fiscal deficit down even as the borrowing programme has bloated sends out mixed signals.
Overall, the Budget is growth enhancing and has laid down a credible roadmap for fiscal consolidation with emphasis on both physical and social capital formation.
(The author is an economist.)