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Budget: focus is on inclusive growth

A view of the Parliament House in New Delhi

One need not be very perceptive to predict the broad contours of the forthcoming budget. There is a spate of reports about the state of the economy. In fact, dissemination of economic information at periodical intervals by government agencies as well as others has helped in demystifying major economic policies to a considerable extent.

As far as the Union budget is concerned, there are still great expectations from the Finance Minister. Over the years, for the common man, it is the anticipation of changes in the tax structure — mostly in direct taxes — that makes the budget process so very exciting.

The process of making more economic information accessible should continue. This will benefit the government, the tax payers and indeed everyone. There will be better appreciation of the boundaries within which budget proposals have to be framed. Such constraints arise out of the fact that all economic policies nowadays stress continuity. In key areas, the planning is for the medium term. There cannot be sweeping changes in tax rates anymore than in interest rate benchmarks (in monetary policy statements).

Besides, in a democracy, there are political constraints. The budget exercise is in fact dictated as much by political factors as economic ones. Next year, there will be a general election while this year will see many States — Karnataka among them — go to polls.

This will be P. Chidambaram’s last full budget as the Finance Minister of the UPA government. He has before him a fairly impressive economic score card .The economy has been growing at a healthy average rate of 8.5 to 9 per cent. Recent official data point to a slowing down but even the lower CSO’s forecast of 8.7 per cent for this year is impressive by any standards. High growth rates, along with significant improvement in tax administration, have boosted tax collections beyond all expectations. The challenge is to maintain the growth momentum in the face of emerging threats.

Inflation has emerged as a major concern with a potential to upset macroeconomic stability. High oil and other commodity prices, especially of food items, have been the main reason. Maintenance of price stability is not the concern of monetary policy alone. Fiscal policy, it is well recognised, has an equally important, complementary role both from the supply and demand sides.

Another major area of concern has been the rupee appreciation. That again is not exclusively in the domain of monetary policy. The rupee appreciation has caused a deceleration in merchandise exports and reduced operating margins of IT companies and a few other exporters of services. During the nine month period April-December 2007 exports increased by 21.8 per cent in dollar terms but only by 7.8 per cent in rupee terms. The upshot is that exports will contribute less to GDP growth this year.

The budget will likely give extra sops to affected exporters over and above what has already been given. Not only the trade deficit but the current account deficit too is set to widen further. These come at a time of great turbulence in the global financial markets and when the slowdown in the global economy looks particularly menacing. Recent developments in the stock market indicate that portfolio inflows cannot be taken for granted hereafter.

This in turn has major implications for domestic investments and capital formation. The recent failures in the IPO market are a clear indication that the global financial market turbulence has affected one section of the Indian capital market that till now had been apparently insulated from external shocks. Given that the good performance of the corporate sector has been one of the contributory factors for the spurt in growth rates as well as in overall savings and investment, any constraint on its ability to raise funds ought to cause serious concern.

Indian companies have expanded abroad through mergers and acquisitions. For them as well as other domestic companies, funding from foreign sources may be severely curtailed and where available will be at a higher cost. The extent of pain that the global downturn and turmoil in the financial markets will cause to the Indian corporate sector is difficult to gauge but it is bound to be considerable.

The budget may not be the only forum to address these concerns but it will have to articulate policy initiatives, some of them going beyond taxation.

Infrastructure deficiency has been identified as a key factor inhibiting growth. Here again, the vitally needed capital for funding large projects may become more difficult to access because of the turmoil in financial markets. Over the next five years, infrastructure development will require some $490 billion. Steps are already on to strengthen the corporate bond market. No budget can afford to ignore the genuine concerns of the infrastructure sector.

Growth with equity is the central theme of all economic planning. The Finance Minister is bound to use the direct tax buoyancy to boost social spending and expenditure on agriculture. Some see the fiscal responsibility legislation (to which the government is committed) as an obstacle to social spending as well as large outlays on infrastructure. Under the FRBM Act, fiscal deficit is to be brought down to 3.3 per cent of GDP in 2007-08 from 3.7 per cent in the previous year. During 2006-07, fiscal deficit, according to official provisional figures, was down to 3.5 per cent. The CSO has revised the GDP growth rate for that year upwards to 9.6 per cent from 9.2 per cent. Hence, despite the slight slowdown this year, the FRBM target may be achieved and even exceeded.

It is certain that the Finance Minister will dwell on the off-budget items — the oil and fertilizer bonds among others — recourse to which has weakened the government’s claims to financial rectitude. Besides, the Sixth Pay Commission’s report is expected. Yet all these are unlikely to inhibit the Government in an election year from increasing its commitment to more inclusive growth as well as infrastructure development.

How well the budget is going to be received will depend on its packaging as much as on its concrete proposals.

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