All the macroeconomic numbers are in, but barring headline inflation based on the wholesale price index (WPI), which is only mildly positive, none of the other indicators provide any level of comfort or confidence to Finance Minister P. Chidambaram in preparation of his budget for the new fiscal.
Having committed to investors at home and at recent road shows abroad on presenting a “responsible” Budget, adhering to the path of fiscal consolidation to contain the fiscal deficit at 5.3 per cent of the GDP (Gross Domestic Product) in 2012-13 and bring it down to 4.8 per cent in 2013-14, particularly irksome for Mr. Chidambaram — possibly a rude shock — was the CSO’s (Central Statistics Office) Advance Estimates projecting a mere 5 per cent GDP growth in 2012-13.
No wonder, in separate statements, the Finance Ministry as well as Mr. Chidambaram himself questioned the CSO’s projection, arguing that the GDP growth this fiscal would be in the region of 5.5-5.7 per cent. It was also pointed out that the 5 per cent growth forecast was a gross underestimate as the CSO had failed to factor in the “green shoots” in the economy.
North Block’s protests on GDP growth were not without reason. For, it was only in late January during his road show in Hong Kong that the Finance Minister had exuded confidence on economic recovery setting in. Having buried the “ghost of GAAR” (General Anti Avoidance Rules) which had scared away foreign investors, Mr. Chidambaram had said: “At the end of this year, we will achieve the target of 5.3 per cent of fiscal deficit and next year I will budget for fiscal deficit no more than 4.8 per cent.”
Predictably, his optimism stemmed from the data Mr. Chidambaram had on GDP growth. “The projection I have received is that [the] economy will grow above 6 per cent [in 2013]. My own assessment is it will be between 6 and 7 per cent. Will be happy if it is closer to 7 per cent, but we should be happy if it is 6 to 7 per cent,” he had said.
To North Block’s chagrin, the controversy over GDP growth estimates has been set at rest by the dismal factory output figure as measured by the IIP (Index of Industrial Production). As per the data, also released by the CSO, industrial output contracted by 0.6 per cent in December, the second such consecutive monthly decline, owing to poor shows by the entire manufacturing sector — including capital, intermediate and consumer goods — and mining coupled with a deceleration in the services sector growth. In effect, the recovery process still remains illusive as the cumulative IIP growth for the nine-month period (April-December) works out to a mere 0.7 per cent as against a 3.7 per cent growth in the year-ago period with just the last quarter (January-March) left for a likely transformation as a result of the reforms initiated thus far.
Surely, the CSO’s growth estimate has turned out to be a major setback to Budget formulation. For the simple reason that the fiscal deficit at 5.1 per cent of the GDP — later eased to 5.3 per cent owing to economic uncertainties — and other targets pegged in the Budget presented by the then Finance Minister Pranab Mukherjee were based on a higher GDP growth assumption. Now, with GDP growth in 2012-13 projected way lower at 5 per cent is likely to upset the budgetary arithmetic as the twin deficits on the fiscal side and current account deficit (CAD) are designated as a percentage of the GDP and both are burgeoning wide off the target. In effect, adhering to the fiscal deficit target in a shrinking GDP will turn out to be a much more challenging task.
Not just that. With low manufacturing output and subdued consumer demand, tax realisations are tepid and the overall revenue collection target set for 2012-13 is unlikely to be met as the mop-up on the indirect taxes front. To make up the shortfall, aggressive measures are afoot to add whatever is possible to the revenue kitty. If this was not bad enough, the trade gap is also widening — at last count it was at $ 20 billion in January — following a steep rise in imports of oil and gold while exports have largely remained muted owing to downturn in markets abroad. As a consequence, the CAD is widening beyond sustainable levels, adversely impacting the exchange rate of the rupee.
So, we have a macroeconomic situation where the GDP growth rate is faltering and needs a dose of adrenalin, industrial growth is straying almost to negative territory and needs steps to kick-start investment, fiscal deficit is way up and needs to be contained and the CAD needs to be tamed by either higher exports or larger foreign capital inflows. Unless these ills are effectively tackled, India runs the risk of a rating downgrade, as threatened by global rating agencies.
The only silver lining is the decline in WPI inflation, despite the fact that food inflation at the retail level is almost near 11 per cent. The Finance Minister thus is faced with an exercise in contradiction. While food inflation can be brought down by looking into the supply-side problems in the long term — and is not particularly a budget initiative per se — interest rates need to be eased to induce consumer spending as also kick-start investment by corporates at a time when there is not much space for either fiscal or monetary stimulus.
The current gloomy scenario thus calls for a fine balance between growth spurs and steps to contain inflation with effective measures to wean away investment from idle gold assets to the equity markets. Apart from high oil imports, a major reason for a widening CAD is the increased investment in gold, not just as a hedge against inflation, but also as a speculative commodity to make a fast buck.
From all accounts, the Finance Minister has a challenging task on hand, possibly the toughest one among his earlier Budget presentations. The irony is that this is the UPA II government’s last full-fledged budget before the Lok Sabha elections in 2014 and party constituents would be duly looking forward to a presentation by Mr. Chidambaram on February 28 tinged with some “populist” measures to woo the electorate. But does the Finance Minister have the scope? Precious little.
