Budget 2011-12 is quite conservative and goes with the belief that GDP growth of 9 per cent would continue in the coming year. If growth slows, which is likely, due to sluggish business environment and the lack of confidence of both domestic and foreign investors, the possibility of numbers going wrong is high.

Fiscal Deficit

Though the Finance Minister has rightly emphasised on bringing fiscal consolidation back on track, the fiscal deficit target of 4.6 per cent of GDP looks ambitious. The target calls for tax buoyancy, disinvestment and subsidy reduction. While the first depends directly on the growth momentum, the other two are not quite certain.

Pegging subsidies lower than the previous year's budgeted amount may be unrealistic given the rise in international petroleum prices, expected food security bill and rising fertiliser prices.

Though the direct cash transfer mechanism will take a few years to implement, the mode of subsidies is the same and the subsidy amount is unlikely to fall. Overall, a fiscal deficit of 4.6 per cent, particularly a revenue deficit of 1.8 per cent, appears to be a difficult target.


Perhaps the most striking feature of this year's budget is the absence of measures to curb inflation. Concerns include the withdrawal of subsidies on major essential items and failure to reduce excise and customs duty on crude oil and petroleum products.

The Government is bound to increase the prices of petroleum products at regular intervals, further escalating inflation. Therefore, if the FM succeeds in cutting subsidies, there will again be inflationary pressures all around, which will neutralise the positive impact of fiscal consolidation.

Although it is a good move to expand the service sector tax base, it might contribute to inflationary pressures in the immediate future.

Though the FM has taken steps to boost agriculture growth, including increasing credit for farmers, augmentation of storage capacity and cold chains, setting up mega food parks, removal of production and distribution bottlenecks for major food items, and so on, efforts to control food inflation would depend greatly on the implementation and delivery systems.

Moreover, these measures are insufficient to boost agricultural growth in the immediate future.

To retain growth at about 9 per cent in the coming year and beyond, savings and investment should return to the pre-crisis level of 2007-08. Investment supported by foreign savings (current account deficit) cannot be stable.

Given the overall perception about the business environment, inflationary pressure, tight monetary policy, global uncertainty and rising oil prices, domestic investments may not increase as expected.

In fact, there has already been a slowdown in FDI inflows (as well as approvals) in major sectors such as real estate, construction, power and telecom.

Budget 2011-12 was expected to announce not only bold reforms but also blueprints to attract FDI, particularly in manufacturing. Though the FM has promised to improve the share of manufacturing to 25 per cent from 16 per cent, which is important to generate employment, there is no clear roadmap other than a promise to formulate a national manufacturing policy. The FM continues to mention ongoing discussions on FDI reforms.


The rapid growth of the economy in recent years has heightened the need for more and improved infrastructure such as electricity, railways, roads, ports, airports, irrigation, and water supply and sanitation.

Infrastructure development is crucial to attracting investment and sustaining high-growth rates. In Budget 2011-12, the 23.3 per cent allocation to infrastructure and the issuance of tax-free bonds worth Rs 30,000 crore are small efforts in bridging the huge demand-supply gap in the infrastructure sector, which is in need of substantive reforms in tariff policy, fiscal incentives, private sector participation, public-private partnership, and land acquisition.

In the backdrop of low investor confidence, India had need for a Big Bang reforms-oriented Budget with a focus on major infrastructure sectors, FDI in retail and insurance, rationalising labour laws, boosting the manufacturing sector and improving agricultural productivity.

But the Budget seems to merely give an account of earnings and spending, without any focus on the real issues affecting growth prospects. It is silent on two important issues for industry and infrastructure today — land acquisition and environmental clearances.

Though the FM's attempt at inclusive growth by focusing on health and education is in the right direction, much depends on the delivery system. Though we always talk about the size and allocations in the Budget, there is no emphasis or consensus on implementation, governance and delivery systems.

(The author is Associate Professor, Institute of Economic Growth, Delhi. The views are personal.)