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— FILE PHOTO

HIGH EXPECTATIONS: Union Finance Minister P. Chidambaram with Ministers of State S. S. Palanimanickam (left) and P. K. Bansal, entering the Parliament House to present the Union Budget for 2007-08.

Since economic liberalisation commenced in 1992, the time when Manmohan Singh presented his ‘Reform Budget’, all budgets were keenly awaited by the markets. However, very rarely any budget got a thumbs up after presenting that in Parliament. The second one, which had a huge immediate impact on markets, was presented by the same Chidambaram, the ‘Dream-budget’ in 1997.

However, there is a paradigm shift on expectations of equity markets on budget this year. While year after year, budget expectations of the stock market were on the rise and anything and everything could impact it, this time the markets look for cues from all over the world rather than just looking forward for the Union Budget.

The tendency of the markets in the past has been that before budget the expectations rally build-up which generally fizzle out with the presentation of the budget. If finance ministers look at stock indices to justify their budgets, they will be doing injustice to the nation. Now at least from this year such scenario has changed as India aligned with the global markets.

To make the budget more people friendly, there are possibilities of extending some tax exemptions or raising tax exemption limits. There are additional benefits for savings, especially for long term, also expected in this budget. These kinds of funds are crucial for infrastructure build up. Further, in order to attract funds to infrastructure, the Government is likely to exempt tax in terms of capital gains and may also announce an interest exemption on funding. Interestingly, the corporate world is also expecting a cut in corporate tax from the current 33.99 per cent to 30 per cent to align it with the Asia Pacific rates. Further, the Government is likely to extend tax breaks on personal income and cut duties on consumer goods.

Inflation control is a major challenge for the Government. Headline inflation has picked up since the beginning of December 2007 with attendant implications at the retail and consumer level. While this is largely attributable to base effects that may extend up to February, escalated and volatile international crude prices and the heightened level of food prices pose clear and present risks to the inflation outlook at the current juncture. To face these issues, the Government is expected to cut customs duty on edible oil and customs and excise duty on processed food products would be further reduced or removed. There is likely to be some announcements to strengthen Public Distribution System (PDS). The Government may re-start edible oil supply through PDS and also allow the Government agency to import at lower duty.

All these have medium to long term implications. In the short term there will be extremely limited impact on prices. Global grains and edible oil prices would remain firm. Crude oil prices also would remain firm. After passing through some rise in global crude oil prices to the domestic petroleum products prices, which was inevitable, the Government is likely to consider a customs and excise duty reduction on crude oil. Large imports will result in “import of inflation or imported inflation.” As noted in the mid-term review of the monetary policy, the immediate task for public policy in India is to manage the possible financial contagion that seems to have highly uncertain prospects of being resolved soon.

However, the Government will find it tough to do a balancing act on the one hand to control inflation and it has to comply with the Fiscal Responsibility and Budget Management (FRBM) Act on the other. The only positive factor, while trying to balance the inflationary pressure, is buoyancy in revenue. Therefore, the degree of freedom for the Finance Minister is limited.

Mr. Chidambaram is in a comfortable position as far as the performance of the economy is concerned, which is on a growth trajectory, with a growth rate of around 9 per cent. However, the growth rate of the farming sector is in the reverse trend, below 3 per cent. India’s agricultural economy still passing through a crisis like situation with 60-70 per cent farmers are not land owners in spite of land reforms. For certain reasons banks are not fully prepared to lend credit to these farmers. The trumpeted economic reforms have not yet percolated to the poorer sections of the society and their standard of living is still at its nadir. UPA Chairperson Sonia Gandhi recently hoped that the Finance Minister will address women and farmers’ concerns in the budget 2008-09. While noting that 8-9 per cent economic growth rate was no mean achievement, she said real happiness would come when the common man’s difficulties were wiped off. Health and education for all was the key to achieve real happiness, the UPA Chairperson said. In the same meeting, Mr. Chidambaram has also reportedly stated that “banks are not doing a favour when they lend money to farmers. Banks are discharging their duty when they are lending money.”

One has to note that in recent years, despite a several fold increase in industrial credit by banks, the corporate sector has increasingly relied on non-bank sources to meet their financial requirements. The corporate sector was raising large resources from capital markets, by way of external commercial borrowing (ECB), besides relying increasingly on internal funds.

These figures clearly reveal that though a large of number of people are involved in agricultural activity and the UPA Government had given thrust to fund flow to the farming community, the credit flow to this sector is much less. While credit delivery to industry or corporates is efficiently handled, this delivery to the farm sector is pathetic. With the Central Statistical Organisation (CSO) projecting a slowdown in farm growth to 2.6 per cent this fiscal from 3.8 per cent in 2006-07, the situation may further deteriorate. The Government is expected to announce higher allocation for irrigation and agricultural production programmes.

While the Finance Minister is likely to announce softer loans for a large number of farmers and as reported the Centre is in the midst of preparing its biggest ever debt relief package for the farmers, the major issue which is facing the vulnerable sections of the society is the credit delivery. About 90 per cent of Indian workers are employed in the informal sector and this sector is often characterised by underemployment as well as low productivity and low skill activities. While suggesting that existing pro-poor activities need to be scaled up, a recent World Bank report stated, “Inclusive innovation can play a critical role in lowering the costs of goods and services and in creating income-earning opportunities for the poor people.” The Reserve Bank of India in its third quarter review also noted that in view of the prevailing liquidity conditions and the sustained profitability of banks reflected in net interest margins, there is a need for banks to undertake institutional and procedural changes for enhancing credit delivery to sectors that are employment-intensive.

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