Budget 2012: Will UPA surprise?

Finance minister Pranab Mukherjee is obviously a worried man as he gets ready to present the Union Budget on March 16. He has admitted to losing sleep over the mounting burden of subsidies. That is not his only worry.

The Indian economy has faced a number of problems in the current year. The foremost is its slowing pace of growth. This week’s “quick” estimate of 6.9 per cent growth in the current year confirmed most analysts’ poor prognosis based on many grim performance indicators that came out in the second half of 2011. This is the slowest growth in three years.
Some indicators of the less-than-satisfactory state of the economy are persistent inflation, stop-and-go pace of industrial production, a steep fall in the value of the rupee, all leading to investor anxieties and some loss of credibility in Indian economic management. A few small improvements reported in January 2012 have now become inconsequential with the confirmation of the slowdown.
Mr Mukherjee faces the daunting task of restoring the economy to the earlier growth path, paying for ever-more ambitious and expensive social entitlement programmes advocated by the Congress leadership and, above all, carrying along vociferous allies committed to populist policies, often at the cost of economic prudence. All these make the next Budget to be among the more difficult ones.
The finance minister’s foremost concern is the one he shares with the aam aadmi: making ends meet. The budgetary deficit target for 2010-11 was met easily because of the windfall gains from 3G spectrum auction. Buoyed by this “achievement”, the Budget for 2011-12 lowered the target a bit, to 4.6 per cent of the gross domestic product (GDP). That this will not be met is merely stating the obvious; the economic mandarins must be trying every known trick to keep the deficit target within reasonable limits.
Last year’s Budget had forecast tax revenues on the basis of the anticipated 8.6 per cent growth of the GDP, while pegging the increase of expenditure at a very modest 3.4 per cent. The economic slowdown has led to a lowering of revenue growth, while high inflation has made a mockery of the expenditure target. Mounting fuel subsidies, now estimated to be at least `50,000 crore higher than budgeted, have swollen the already high burden of subsidies. The deficit genie is now well and truly out of the bottle and likely to be close to six per cent of the GDP, notwithstanding all the recent statistical skullduggery.
In theory, this need not have happened. With signs of the slowdown becoming increasingly clear, the government could have readjusted its spending priorities in line with current expectations and even explored possibilities of raising additional revenues. It could have linked all domestic fuel prices (and not just that of petrol) to the landed rupee costs of imported oil and gas, which have risen steadily due to higher international oil prices and falling rupee. But that would have required managing recalcitrant allies. Political skills required to accomplish this are of a far higher order than those displayed by the Congress in UPA-2. The much talked about paralysis at the top has affected not just reform and growth policies but prudent housekeeping as well.
The budgetary deficit is not the only one that hurts. The commerce ministry feels that even if exports continue at the December level of $25 billion a month for the rest of the year, imports will exceed exports by around $155-160 billion. This level of trade deficit is too high and is bound to affect the balance of payments adversely after factoring in remittances and net investments. The pressure on the rupee would continue.
The current fall in inflation is almost wholly because of a larger-than-expected seasonal drop in the price of vegetables in November-December 2011, which will most likely be corrected, as noted in the Reserve Bank’s review of the economy in the third quarter of the current financial year. Mr Mukherjee’s hope of ending the year with seven per cent inflation hangs in the balance of mandis, because manufactured articles and energy prices show no signs of abating.
The net effect is that budget-making will be a tightrope walk, balancing various pressures and allowing no more than cosmetic changes. The Congress banks on a wish-list scenario of a change in the coalition calculus post the Uttar Pradesh elections, with the Samajwadi Party in the UPA fold to counter the veto power of the Trinamul Congress. Even if this happens, the new allies would have their own populist compulsions which would add to, rather than detract from, the difficulties of hard and pragmatic economic decision-making.
Mr Mukherjee’s degrees of freedom to mobilise additional resources will thus be as constrained as they are now, while the demands on what he manages to collect will undoubtedly increase. The proposed Food Security Bill will push the food subsidy to `1 lakh crore or higher. Every state and Central government department will continue to press for additional budgetary support. The government cannot keep printing money without adding to the inflationary spiral, nor can it easily hive off public sector assets to generate revenues, because that would most likely run afoul of some political formation within or outside the government.
The unfortunate consequence of the highly fractured Indian polity is the prevalence of the permanent election mode, not only because some major state or the other is going to the polls but also because changing state electoral fortunes affect the Centre as well. It would be wishful thinking to expect that an alternative ruling combination would produce any different results because, basically, that would be reshuffling the same deck of cards among the same set of players. Bringing in others, say, state leaders with relatively good economic records (who usually have fewer pressures and easier alibis for non-performance), to manage the national economy which has complex and extensive demands and pressures, would not guarantee more satisfactory results. The UPA does not really trust outsiders anyway, and it is anybody’s guess at this stage how well any of the NDA state chieftains would function at the Centre if and when such a possibility does materialise. Union budgets are now obviously driven by short-term political considerations. The casualties of this approach are the pressing developmental priorities of efficient resource use and inclusive growth. That requires a separate discussion.
In the meanwhile, I do not await the budget with bated breath. But I would be only too happy to have egg all over my face if Mr Mukherjee, the government’s go-to guy for all reasons and seasons, delivers a blow for real development as an Ides of March surprise for
us all.

The writer taught at IIM Ahmedabad and helped set up the Institute of Rural Management, Anand.
He writes on economic and policy issues.