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Friday, April 15, 2011

Budget 2011: Will the Gods Deliver?

Amidst the global political turmoil and the easy money policy of the US that have sent the prices of crude oil, gold and silver spiraling up, high domestic inflation, especially of food items, rising interest rates, and the multiple scams and corruption scandals, it is redeeming to hear about a budget that talks about fiscal consolidation: the government projects a net borrowing of Rs 3.43 lakh cr and a fiscal deficit of 4.6% for the fiscal 2010-11. A remarkable achievement!

A cool reading of the budget figures, sans emotions, however makes one skeptical of the same. The Finance Minister is heavily relying, for his estimated reduction in fiscal deficit for 2011-12, on curtailing growth in expenditure, which he pegged at just 3.4%, as against 18.7% of 2010-11. Now, is this possible? Is it by way of cutting non-plan expenditure and letting a modest rise in plan expenditure? But a look at what has happened during 2010-11—non-plan expenditure was up by 4% and plan expenditure by 30%—does not encourage one to accept the tenability of these estimates. Over and above it, the party in power at the center is said to be all set for enacting the Food Security bill, and it has already agreed to link wage payments under NREGA to consumer price inflation. Yet, the budget provides for no rise under these heads. Similarly, the provisions under other subsidies are modest, while the global oil prices are on the rise. To a certain extent, the Finance Minister may make up for these shortcomings by improving revenue estimates. But here again one is not sure, for whatever rise under this head was realized was more out of the 3G auctions—a one-time affair. Cumulatively, the whole scenario makes one wonder if the budget can live up to expectations.

Coming to the individual taxpayers and companies, the Finance Minister did, of course, offer relief by not proposing new taxes. By permitting foreign institutional investors (FIIs) to invest in mutual funds, he gave a kind of much-needed boost to this beleaguered sector, which might also positively impact the capital market. But the opening up of equity markets to all overseas investors, of course, subject to their satisfying the ‘Know Your Customer’ norm, might only lead to inflow of short-term capital, which is sure to increase volatility in stock market, besides making things worse for the RBI to manage exchange rate volatility, more so when FDI is declining considerably.
Coming to the haunting inflation, the Finance Minister cheered the market by assuring that the economy will grow at 9% and with a promise to bring down inflation. But it is, of course, not clear how he is going to bring down inflation from the current level of 10% to the anticipated 6%, particularly in the light of: one, cash that is being pumped into rural areas under the ongoing rural employment scheme to relieve the rural poor from dire poverty is sure to raise demand for more food; two, in fiscal 2010-11, in order to achieve ‘inclusive growth’, it is planned to increase social spending by about 17%. And the proposed cash transfer to the beneficiaries, instead of the present practice of food distribution through the corrupt Public Distribution System, is certain to soar demand for food further, while nothing substantial is being planned for increasing food production in the country as a whole, despite clear indication that the present spiraling food prices are mostly driven by supply side constraints, a fact vindicated by RBI’s act of raising interest rates eight times having little or no impact on inflation. Despite these hard realities, nothing much has been contemplated in the budget about improving agricultural production in the country except for the Finance Minister saying, “Unless we have another green revolution, we cannot feed the growing population.” 

Finally, coming to the much-needed reforms, there is nothing much to gloat about: the policy framework is not ready for new banking licenses, though a year has elapsed since the original proposal. So is the case with regard to the Direct Tax Code, removal of supply side bottlenecks pertaining to food items, administrative reforms under tax system, the fight against corruption and the intent to curb the generation of black money. In short, everything remains the same as before; and there is not even the introduction of the much-desired General Sales Tax, for all the states are yet to commit to its implementation.

That said, it is in order here to recall what Milton Friedman said to Indian policymakers in the 1950s: “In any economy, the major source of productive power is not machinery, equipment, buildings and other physical capital; it is the productive capacity of the human beings who compose the society. Yet … expenditures that improve the productive capacity of human beings are generally left entirely out of account.” This advice is certainly more pertinent today than when it was rendered, for today we have economic growth that can address the developmental needs of people, provided the leadership is for it. If India has to gain anything worth out of its ‘demographic dividend’, its budget should aim at the enhancement of its peoples’ skills and productive capabilities rather than mere growth in macroeconomic indicators.

In the meanwhile, let us join with folded hands the Finance Minister in his prayers: “I require only the blessings of a god and a goddess” (in delivering on the wish list).
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- GRK Murty


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