Tale of missed opportunities

The Budget has been extraordinary in evoking a wide range of responses — from that of sheer disappointment because of the lack of any major reform announcements, to a balanced exercise which promises more in the future, to being strongly appreciated by experts who see it as a major effort at fiscal consolidation. The truth must, therefore, lie somewhere in between.

My own assessment has been that this Budget is a workmanlike effort which does not go for the headlines but tries to stay the course and hopefully prepares the economy for major reforms such as direct cash transfers, financial sector liberalisation and modernisation, introducing the Direct Taxes Code and implementing a unified goods and services tax. I wish, however, that the Budget had included some specific timelines for these initiatives to instil greater confidence. That would have indeed made it more sophisticated and perhaps even memorable.

In his Budget speech, the Finance Minister displayed his grasp of all the challenges and difficult issues facing the economy. In a number of areas, such as further relaxation of FDI inflows in multi-brand retail; financial sector reforms; and land and labour issues faced in the expansion of manufacturing sector capacity; he came tantalisingly close to taking the reform plunge. But he held back, perhaps for political reasons known to him alone.

Having cake, eating it too

A less charitable interpretation of this inability to translate rhetoric into reform action is that this approach successfully manages to placate the fiscal purists; conveys the Finance Minister's readiness to implement needed reforms; and yet continues with the status quo with some tweaking at the margins. So we can maintain the status quo while appearing to pursue reforms, and in effect have one's cake and eat it too!

The underlying premise seems to be that “if it ain't broke, don't try to fix it”. This is a sound approach, especially when economic growth at 9 per cent or higher is pretty much assured. This high rate of economic growth (about 15 per cent in nominal terms, assuming 6 per cent inflation) combined with some increase in tax compliance and revenues from disinvestment holds the promise of generating higher revenues in coming years. These revenues can be used for increasing the volume of subsidies and, more important, allocating higher amounts for direct poverty reducing schemes such as MNREGA or PMGRSY, or to waive farmers' loans if the additional interest rate subvention is seen as inadequate.

This strategy, if successful, ensures the highest probability of electoral success in the coming State Assembly elections and indeed for future times as well. Therefore, the Finance Minister could congratulate himself for achieving both high economic growth and expanding outlays poverty reduction programmes.

Is there any flaw in this otherwise electorally optimal strategy that also delivers on economic growth and rising middle-class prosperity? None whatsoever, unless exogenous shocks, like a steep hike in crude oil prices or a failed wheat crop in China, come into the picture. This will put inordinate pressure on the rather fragile macroeconomic stability that the Budget has tried to nurture by apparently pursuing a path of fiscal consolidation.

Better consolidation

If the macroeconomic situation does not stabilise in the coming months, all bets on India carrying on with rapid growth rates and also addressing poverty reduction will be off. Rising or persistent inflation either due to domestic factors or to higher global commodity prices and markets upheavals, will force the RBI to raise interest rates that could choke off investment demand, as well as the demand for consumer durables and housing. This will necessarily bring down growth rates and with it the ability to continue with large-scale resource transfers for poverty reduction. To prevent this, the Budget could have made a more robust effort at fiscal consolidation. Given the current estimates of, and assumptions underlying, both revenue growth and expenditure outlays, the target of bringing down the fiscal deficit to 4.6 per cent of the GDP in 2011-12 looks improbable.

The overall increase in public expenditure (BE 2011-12 to BE 2010-11) is a mere 13 per cent, which implies a lower public expenditure- to-GDP ratio with nominal GDP growth assumed at 14 per cent. The increase in total non-Plan expenditure is only 11 per cent. Minus the outgo on interest payments, defence and subsidies, this comes down to an improbable 9 per cent.

This significant reduction in public expenditure will be impossible to achieve. This is especially true in light of higher petroleum subsidies required as a result of rising global oil prices; the nearly Rs 30,000 crore under allocation for fertiliser subsidies, according to industry estimates; the inadequate allocation for financing the food security provisions by at least Rs 10,000 crore; and budgeting of Rs 40,000 crore for MNREGA, which assumes neither an improvement in its implementation nor a higher allocation for for inflation indexation of wages.

These are heroic assumptions. The result will be a significantly higher borrowing requirement than is budgeted. This translates to a greater pressure on market interest rates that will keep capital costs high and dampen much needed investment for capacity expansion in manufacturing. We may consequently come to see this Budget as an opportunity missed.

(The author is Director-General, FICCI. The views are personal. blfeedback@thehindu.co.in )

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