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Chidambaram needs to do a balancing act Run-up to budget 2008-09

New Delhi: With the United Progressive Alliance government set to present the Union budget for the new fiscal in nine days from now — its last full annual exercise before the 2009 general elections — Finance Minister P. Chidambaram has a tough task on his hands. Faced with conflicting demands from different quarters, including his own party seeking special attention to the monetary interests of the aam aadmi, he has to do a fine balancing act to prop up the farm sector, keep up the growth tempo and rein in inflation alongside, while appearing to please most sections within the limits of fiscal prudence.

On the economic front, barring the imperative of “inclusive” growth still remaining more of a slogan, no regime at the Centre had it so good in recent times. The country’s GDP (gross domestic product) growth rate has been testing new highs over the last few years, raising expectations of a near nine per cent increase. Aided by better tax compliance and a healthy corporate performance during the last three quarters, revenue collections from both direct and indirect taxes have soared and are set to touch the budgeted targets, if not exceed them.

Foreign exchange reserves have also been burgeoning while the stock markets peaked to record levels during the current fiscal on the strength of strong corporate results, leading to massive buying by foreign institutional investors (FIIs). Alongside, with the gradual opening up of various sectors, the inflow of foreign direct investment (FDI) has remained strong while inflation, after some initial hiccups, has been reined in within the Reserve Bank’s “comfort” zone of 4-4.5 per cent.

On the whole, it could well have been party time for the UPA regime under the stewardship of Manmohan Singh, but for the chilly westerlies — mainly the sub-prime mortgage crisis leading to a slowdown in the U.S. and the spectre of recession looming on the horizon. Although the fallout on India is not expected to be as chilling as on some of the other export-led economies, certain sectors of its economy have already been affected and require further remedial measures.

For one, the labour-intensive export sectors such as textiles, leather, handicrafts, gems and jewellery and information technology have already been severely affected and the export target set for the year is unlikely to be met. Besides, the massive capital inflow owing to the periodical cut in interest rates by the U.S. Federal Reserve has resulted in the rupee appreciating against the dollar, leading to a further squeeze in export margins. Clearly, the relief packages announced earlier during the year have not been enough and some more sops are required to bale these sectors out.

Second, and more important, the government is committed to ushering in inclusive growth. This will be possible only if more focussed attention is paid to agriculture and rural development as the farm sector caters for the livelihood of nearly 80 per cent of the country’s population.

In effect, this will mean increased allocations for social sector programmes such as health and education, better village infrastructure, easier credit availability to farmers and higher prices for their produce, apart from dedicated relief packages to improve the general well-being of the farming community and rural folk.

Alongside, even in the wake of the slowdown in the U.S., international prices of crude soared to unprecedented levels, which forced the government to go in for a marginal hike in fuel prices, despite its likely cascading inflationary impact on the price line. What is worse, global food prices are also in an upswing. This does not provide the cushion of imports to hold the domestic price line as it would then add to the subsidy on food.

Essentially, to ensure that the common man is not unduly burdened, the government’s foremost task is to control inflation as the people’s tolerance on that front is not very high. Already, the RBI’s monetary tightening measures to contain prices have seemingly led to a slowdown in sectors such as housing and manufacturing, especially consumer durables, and efforts are now under way to revitalise them.

Apart from the funding needs for infrastructure development, the government will have to make adequate provisions for implementation of the Sixth Pay Commission recommendations by way of substantial salary hikes for Central government staff likely during the new fiscal which, in turn, would add to the inflationary impact on prices.

Little wonder then that in such a scenario, especially when the general elections are due in 2009, the ruling Congress has sought special sops to woo the taxpayer and the common man by way of higher basic tax exemption limits for all categories along with a restructuring of income-tax slabs and reductions in excise on various goods to render them more affordable. For this, it has suggested a three-year pause in adhering to the Fiscal Responsibility and Budget Management (FRBM) Act, if need be.

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