The Finance Minister faces the conflicting objectives of sustaining stimulus-aided growth and ushering in fiscal consolidation.
If the key macro policy objectives of the last Union budget were to combat the slowdown in the wake of the global financial crisis and stimulate economic growth at whatever cost — even at the expense of an “unsustainably high fiscal” deficit — the prime task before Finance Minister Pranab Mukherjee for the new fiscal appears more challenging.
In his budget presentation today, the Congress-led UPA government's “man for all seasons” has to chart an achievable road map to sustain the stimulus-aided recovery momentum for taking the economy to a higher growth trajectory and, at the same time, usher in fiscal consolidation while ensuring that the inflationary spiral, especially of essential food items, is contained at tolerable levels.
On the face of it, the objectives are at conflict with each other.
For, if public spending is controlled along with a rollback of consumer-oriented stimulus measures, economic growth may get stymied.
On the contrary, if the stimulus measures continue, they may further stoke inflation, led by a further rise in food prices, and seep into manufacturing inflation and thereby invite monetary measures by way of higher interest rates. What renders the budgetary task harder for Mr. Mukherjee is the fact that the fast turnaround in the economy in the current fiscal has raised official hopes — as per the Economic Survey — of well over eight per cent growth in 2010-11. And this, when the rising growth trend has primarily been owing to the four fiscal packages accounting for an overall stimulus of nearly Rs.2,18,000 crore. The major stimuli which boosted consumer demand and led to a surprisingly better-than-expected industrial growth and consequent GDP (gross domestic product) expansion were the hugely increased public spending on infrastructure and other social sectors that led to a net market borrowing by the Centre of Rs.3,97,957 crore coupled with sharp cuts in excise duty from 14 to eight per cent and in service tax from 12 to 10 per cent.
Now that the economy is on a much firmer footing, will the Finance Minister roll back the fiscal stimulus measures? Economic analysts, including the Prime Minister's Economic Advisory Council (PMEAC), have suggested at least a partial rollback, starting the new fiscal itself, which has been ratified by the Survey. Though now reconciled to a nominal hike, India Inc. is of the view that the high growth is restricted to select sectors and, therefore, the incentives should stay for some more time to pre-empt another slowdown.
Considering that Mr. Mukherjee himself has reiterated time and again that the stimulus would stay until the global economies recover and domestic growth becomes deep-rooted, the middle path he may adopt is to hike the excise duty by two percentage points in certain sectors and widen the service tax base to peg both levies at 10 per cent. The calibrated approach would be more as part of the transition to the combined Goods and Services Tax (GST), which is now likely to be implemented from 2011-12 instead of the original deadline of April 1, 2010.
With the reform in direct taxes by way of implementation of the Direct Taxes Code (DTC) also proposed from 2011-12, the Minister is not expected to tinker much with personal and corporate taxation. However, a customary increase of Rs.10,000-15,000 in the basic exemption limit for individual taxpayers is on the cards to make up for the burden of food inflation, while corporates may look forward to some changes in the surcharge. As at least nine aspects of the DTC draft provisions are currently under scrutiny, the budget is unlikely to upset the simplification that is sought to be ushered in until the hitches are sorted out.
Also, having increased spending allocations much beyond fiscal prudence during the current year, Mr. Mukherjee is expected to ensure that public expenditure is targeted better at the intended beneficiaries as the delivery mechanism has a lot of room for improvement. This would include better targeting of various subsidies so as to contain expenditure, especially when the PMEAC has pointed out that the spending has been more on consumption than asset building. While a beginning has already been made with a cut in fertilizer subsidy by way of the nutrient-based scheme, such a move does not seem possible on the Kirit Parikh panel recommendations on petroleum fuel pricing and deregulation in view of the vehement opposition and the chances of inflation being fuelled further.
A decision on this is expected to be taken outside the budget and at a time when international oil prices soften as the Survey also makes no mention in this regard. As for the reduction in fiscal deficit, there are, as Mr. Mukherjee himself pointed out last year, quite a few positive factors. Pay Commission arrears are out of the way and neither will there be the burden of farm loan waiver during the coming fiscal. These, coupled with the higher than expected growth, will lead to a significant reduction from 6.8 per cent of the GDP this fiscal. Apart from these factors, the 3G auctions are expected to fetch Rs.30,000-35,000 crore, while the listing of profitable enterprises during the year may fetch about Rs.25,000-30,000 crore. All these taken together, it may not be difficult for Mr. Mukherjee to peg the fiscal deficit at about 5.5 per cent of the GDP in 2011-12.
However, the ifs and buts remain. Even as the government adheres to a disinvestment road map, much would depend on the sentiment on the bourses which, in turn, is dependent on the pace of global recovery.
Mr. Mukherjee's objective of people's partnership in public undertakings may not happen if retail investors' response remains as lukewarm as it has been in recent times. Also, on the domestic front, the stock market, according to analysts, would watch out for the extent of market borrowings by the government during the year.
In case the borrowings are larger than market expectations, the sentiment would be negative which, in turn, would affect the disinvestment programme.