Budget 2011-12: As good as it gets

The Finance Minister, Mr Pranab Mukherjee, has set out the Union Budget for 2011-12 against the backdrop of difficult political economy constraints and multiple commitments. Under the circumstances, he deserves to be commended for the fine balancing act. Some of the concerns, however, have not been fully addressed and, in some ways, are contradictory.

The Budget for 2011-12 is premised on the objective that the 8.6 per cent real rate of growth in 2011-12 must be bettered by a growth of 9.0 per cent (with a band of +/- 0.25 per cent) in 2011-12. It may be difficult for the pace of increase in agriculture in 2010-11, which showed a sharp rise over the previous year, to be repeated in 2011-12.

Moreover, with the firm objective of a significant and enduring reduction in the inflation rate, it is difficult to reconcile both objectives. Underlying this dilemma is the aversion of the authorities to accept the concept of “overheating” of the economy. To achieve 9 per cent growth in 2011-12, it is important that the global recovery, which is still hesitant, turns into a decisive recovery.

In addition, there is the implicit premise that inflation would just go away without harsh monetary-fiscal policies. In contrast, the Chinese authorities unequivocally recognise overheating of the economy and are targeting a lower rate of growth. The hard issue that has to be squared up in the Indian context is what would give way — growth or inflation?

The Finance Minister deserves to be commended on a number of counts. First, despite a difficult fiscal situation, he has adhered to the earlier commitment to eschew off-Budget financing (i.e. quasi-fiscal deficit) by issuing bonds in lieu of subsidies for oil and fertilisers.

Second, there is greater transparency than in the earlier period, by clearly revealing the nominal GDP assumption for 2011-12. The nominal GDP growth of 14 per cent is an admixture of assumptions of real growth (9 per cent) and inflation (5 per cent); in fact, the two numbers could be fluid and this needs to be factored in while assessing the fiscal deficit of 4.6 per cent of GDP in 2011-12. In other words, the quality of fiscal adjustment is important.

Third, although the FM has felt the need to cushion the impact of inflation on lower/middle income groups by easing the direct tax regime, he has balanced this by increasing indirect taxes. While noting this, it bears mentioning that direct taxes are progressive while indirect taxes are regressive.

The Finance Minister, while referring to public sector unit disinvestment, has reiterated the commitment to retain 51 per cent majority ownership. In the case of public sector banks (PSBs) this is of considerable relevance. In 2010-11 the government provided Rs 20,157 crore to PSBs to maintain the 8 per cent Tier I Capital to Risk Assets Ratio (CRAR) but in 2011-12, only Rs 6,000 crore has been provided. Broad estimates are that, over a period of five years, the banks would need an injection of about Rs 60,000 crore from government.

The present approach of providing capital according to the needs of each bank implies that PSBs would grow at more or less the same pace and the system would be relatively weak. An alternative could be to plough back the profit transfer to each bank and tilt the injection of funds by government to the stronger banks, which would strengthen the PSB system.

The FM is to be commended for committing to introduce the Public Debt Management Agency of India Bill in 2011-12 and the setting up of an independent Debt Management Office. The separation of debt management policy and monetary policy was enunciated by the Narasimham Advisory Group on Transparency of Monetary and Other Financial Policies (2000). It is unfortunate that these measures take inordinately long to be implemented.

There has been considerable debate on the granting of new licences for private sector banks, but potential aspirants have been kept twirling in the wind. One hopes that in keeping with the FM's commitment, the guidelines would issued by the RBI by the end of March 2011.

The setting up of the Financial Sector Legislative Reforms Commission was announced in the Budget of February 2010. While the Chairman has been named, the composition of members is yet to be announced. Since the Commission has an arduous task to be completed in 24 months the composition should be made known forthwith and the Commission should be operational by April 1, 2011.

Taking all things into account, the Budget is as good as it gets.

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