Friday, March 16, 2012

A patchwork finance budget shows no clear direction to Indian economy.

Economic & Political situation:

The Economic Survey document released yesterday presented a situation that challenged the Union Finance Minister to take bold steps in this year’s union budget as far as structural reforms are concerned . For the situation described in the Economic Survey appeared dismal. The GDP growth has slowed down to 6.9% after cruising at 8.4% for preceding 2 years. WPI inflation (52 week average ) had risen to 9.1% from 3.8% in 2009-10.The fiscal deficit as per budget estimates was pegged at 4.6% . The decline in GDP growth was attributed to the non-performance in Manufacturing sector which registered only 3.9% growth while Services grew by 9.4% and Agriculture by 2.5%.

The Union Finance Minister, Pranab Mukherjee attributed this fall of GDP to global crisis existing in Eurozone, Middle East, Oil price rise as well as due to the tight monetary policy of RBI that affected investments & savings & weak industrial growth . Interestingly in 2007-08, the government would project about the strong domestic demand in order to assure foreign investors that India-growth story is reasonably de-linked from the global financial crisis. Now the same government is pointing out to global crisis to possibly gloss over the fact that the large-scale fiscal stimuli that it had engaged in 2008-09 & 2009-10 ,(including the enhancement of government employees’ salary in 6th pay commission), had failed to either build new productive capacity or to increase the aggregate demand.

The minister while presenting the budget stressed that signs of economic recovery are showing specially in coal, fertilizer, cement & electricity generations which registered positive growth in Jan’12 (although crude oil, natural gas , refinery products & steel registered negative growth in Jan’12). With inflation slowing down to 6.6% in Jan’12 and food inflation going to negative, one expected that the finance minister to take the opportunity in stimulating growth by a slew of policy & measures that would encourage capital formation, investments . Major policies like the land acquisition policy, mineral rights of dwellers, FDI in retail, labour reforms , enactment of direct Tax code, Goods & Services Tax, Food Security Bill , Pension reforms, Insurance reforms, Microfinance institutional reforms and other policies are still not passed thanx to the stalemate in the parliament where the ruling government was not sure of the support from members of its allies. With such a paralysis on policy formulation , the minister paid moderate lip-service to the objectives that he highlighted while presenting the budget. The objectives were

1. Increase in Demand recovery by creating high growth in private investments

2. Remove supply bottlenecks in agriculture, power, coal sectors

3. Address malnutrition

4. Streamline delivery systems of subsidies

5. Address the issue of corruption.

Expectations from the stakeholders

The industry bodies attributed the fall in private investment in 2011-12 to low profitability which was attributed to higher raw material expenses in the first half of last year as well as to higher interest expenses. Hence they expected a lowering of interest rate & reduction of raw material expenses along with increase in government consumption for kick-staring growth. The common man already squeezed by high inflation & low unemployment was looking forward to tax breaks, generation of more rural employment in agriculture and urbal employment in services.

But since the chief task in the hand of the minister was to engage in fiscal consolidation which basically means reducing government expenditure while increasing the revenue so that a very high fiscal deficit of 5.9% in 2011-12 could be brought down to 5.1 % in 2012-13. And with policy-paralysis as background , the minister had no other options but to give little to everybody without taking away substantial from anybody. In common parlance that would be called an ordinary & lackluster budget which doesn’t have a specific long-term direction but has merely given an extension of an additional year of preceding policies & schemes in order to buy some more time to find sufficient strength in the parliament to embark on serious economic reforms.

Author's note : A Bengali transcreation of this budget analysis can be found at here.