Spotlight on the common man

The only function of economic forecasting is to make astrology respectable . — J. K. Galbraith

The Union Budget for 2011-12 should be a welcome one for most people. The relief in direct tax will make the middle-class happy. Such measures as interest subvention for small loans for agriculture and housing and indexation of wages to inflation under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), etc., are beneficial to the common man.

When implemented, the Goods and Services Tax will usher in a better indirect tax regime.

For the macroeconomist, the criterion for judging the Budget is its impact on growth and price stability. Net investment is of prime importance in this connection. Details of expenditure are not available, in the absence of the relevant documents.

Inflation factor

According to the Budget for 2010-11, revenue or consumption expenditure accounted for as much as 86.5 per cent of the total, leaving only a small balance for capital expenditure, which was for both fresh creation of assets and for maintenance. Together, interest payments, subsidies and Defence took away 40 per cent of the total outgoings.

Plan expenditure constituted only one-third of the total. One does not expect any marked changes in these proportions in 2011-12. The amounts are in nominal terms. Any comparison with the previous year needs to reckon with inflation. One does not know how much, if at all, the net amount will increase in real terms. Hence the claim that development expenditure is raised substantially next year needs to be looked at closely. Economic theory tells us that sustaining growth requires rising investment level. Such schemes as the MGNREGS, coming under the category of rural development, do not really result in the creation of durable assets, or even better maintenance of the existing ones, given the widespread perception and anecdotal evidence on leakages based on field studies.

Nine per cent?

If there is growth, to a large extent it will be due to the kindness of the rain gods and the performance of the private sector. There is a big question mark against the predicted GDP growth rate of 9 per cent.

The effects of the Plan schemes in enhancing output are not as certain as the addition to aggregate demand resulting from the Budget measures. The indexation of wages under MGNREGS would further exacerbate the demand-side pressures on food items, such as vegetables and fruits. The Government should give some thought to augmenting supplies and not allow itself to be taken by surprise, as in the recent months.

Although the fiscal deficit is estimated to come down to 4.6 per cent from 5.1 per cent, the underlying amount is huge, creating pressures in the market and calling for intervention by the central bank to engage in debt management operations in the guise of open market operations.

On the whole, there is unlikely to be much relief on the inflation front. At best, one can hope for disinflation, not price stability, given the uncertainties at home and abroad.

(The author is a Mumbai-based economic consultant.)

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