Implementation, the key

Motilal Oswal | Updated on March 01, 2011 Published on March 01, 2011

Mr Motilal Oswal

A bold attempt at balancing growth and inflation.

The Finance Minister, Mr Pranab Mukherjee, is known to compromise on fiscal reforms to meet political needs. This time, he was faced with a tough task – that of reining in inflation while keeping the economy on a high-growth path. He did not disappoint, and has made an honest effort to deal with the situation.

The Congress party leadership was not expected to make tough belt-tightening decisions. It is on the backfoot over corruption scandals and faces elections in four major States. Therefore, there are no policy reforms to speak of.

A situation of sticky inflation , driven by high food and other commodity prices, combined with a high fiscal deficit, had prompted the central bank to call for fiscal consolidation.

The Finance Minister has projected a fiscal deficit figure of 4.6 per cent for 2011-12However, New Delhi has historically tended to bank on higher revenues rather than spending cuts, a formula that worked in the current fiscal , thanks to a windfall from the sale of 3G bandwidth. But this year, there is nothing of the kind, save a reference to unearthing black money through a five-pronged strategy.


The Finance Minister's effort would be assessed on certain key issues. These are:

Has he trimmed the fiscal stimulus?

He has. The Finance Minister intends to reduce the fiscal deficit to 4.6 per cent of gross domestic product in 2011-12 and 4.1 per cent in 2012-13. He expects to do this not by withdrawing the stimulus, but through increased reliance on revenue projections. He also assumes far lower subsidy figures on food, fertiliser and oil. Partially, the Finance Minister has also relied on a surge in domestic demand and global recovery to drive tax receipts to meet fiscal targets.

Has he rationalised oil subsidies and duties?

The implicit subsidy numbers suggest as much, but that would mean pricing diesel, LPG and kerosene at market-related prices. There is no explicit mention of this in the Budget.


Has he aimed at curbing inflation without hurting growth? This is a major challenge. India wants its economy to grow at 9 per cent in 2011-12, up from about 8.5 per cent this fiscal year, even as inflation remains well above the government target, at 8.23 per cent in January. More infrastructure steps have been announced, which would help ease bottlenecks. The Finance Bill has increased outlays for roads, ports, airports and railways, as well as for health and education, by about 25 per cent over last year's budgeted figures. The Finance Minister has directed funds towards more production of milk, poultry, fish, vegetables and fruit, which have driven food inflation. The allocations in this regard may be considered quite inadequate.

Has the Finance Minister announced major reforms?

Not really. He has, however, announced the setting up of an infrastructure debt fund and initiatives to deepen the corporate debt market.

The Finance Minister has allowed foreign citizens to directly invest in SEBI-registered equity mutual fund schemes in India. This can be seen as an effort alleviate dependence on foreign institutional flows to fund the current account deficit.

All in all, there is a bold attempt to deal with the challenges head-on. The key would lie in execution and implementation.

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Published on March 01, 2011
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