Budget 2010 may disappoint those who are expecting major policy announcements or for that matter the stock markets but the annual February exercise this year will, perhaps, be the keystone for India’s future growth story. This budget is expected to have a larger audience on the global stage as it will be a statement of fiscal consolidation as opposed to fiscal profligacy last year. If finance ministers across the world were busy trying to boost demand and consumption last year, this year it is all about bringing back fiscal prudence and discipline while giving enough room and cushion for growth to unfold. India will be no different.
In just four days from now, finance minister Pranab Mukherjee will present his second budget in eight months. The world economy that was on the brink of collapse following the financial mess and the recession in the developed economies has moved on and is beginning to find its feet yet again. Key policymakers have already pronounced that return to fiscal consolidation is not a matter of choice anymore. Mukherjee, who is an astute political leader, believes that reforms or any hard decision will need a political consensus for it to be a success. The question , therefore, is whether these hard decisions have a political consensus.
It is no easy job, particularly given the coalition factors within the government. In most cases, while many of these political leaders privately agree that subsidies should be targeted more judiciously and unnecessary expenditure should be pruned, the public stance is often very different. And why blame the coalition partners alone? Members of the ruling Congress party, including some key cabinet ministers have preferred to speak the populist language rather than walk the talk on some key economic decisions. Delays in some of these decisions like fuel price hike or fertiliser subsidies is bound to cost the government dearly for what could have been a mild painkiller will now have to be dealt with some strong bitter medicine. And this will require some deft political will power.
The FM may choose, and rightly so, to keep key policy announcements outside the budget, but the direction to the forthcoming policies will have to be laid out in the budget. The government’s policy on fertilisers that was announced just days ahead of the budget , has given some sense of how fertiliser subsidies will be pruned as the government moves towards a nutrient based fertiliser subsidy regime. In the same way, the government’s numbers on fuel subsidies put out in the budget document will throw some hints as to which way the fuel policy will go.
While most agree that it is not the finance minister’s job or for that matter, that of the budget, to lay down fuel prices for the consumers , the issue of subsidies is the centrepiece in the government’s finances and the annual budget. With fuel and fertiliser subsidies being close to Rs 1,50,000 crore, it will be difficult for any FM to disregard this expenditure while talking of fiscal deficit.
The Thirteenth Finance Commission that would be tabled in a day or two has prescribed some strict measures to bring back fiscal discipline. chairman and author Vijay Kelkar believes that reining in the fiscal deficit will perhaps be an easier task now, as the government prepares to launch two gamechanging tax initiatives, the direct taxes code and the goods and services tax. But it is the political consensus among diverse state governments that perhaps will be the clincher, the finance minister can bet on, to unfold the fiscal consolidation road map.
Kelkar, who held extensive deliberations with every state government during the preparation of the finance commission report says that there is a huge change in the political mindset among states and each one of them is today sensitised towards the need to keep expenditures commensurate to revenues.
The prime minister’s Economic Advisory Council headed by Dr C Rangarajan has estimated that bringing down the fiscal deficit by 1.5% within the next fiscal is easily done thanks to the absence of some of the recurring expenses like pay commission arrears or loan waivers. Given the fact that growth is on the pick up and the economy will bounce back to 8% plus by next fiscal, revenues too should be buoyant. Add to that the minor adjustments in key tax rates (a hike in cenvat and service tax is likely) there should be a comfortable upside to revenues for the government. The divestment proceeds (projections of around of Rs 50,000 crore in the next fiscal provided the markets do not spook) will only help the government in taking care of a large part of their flagship programmes targeted at the aam admi.
Known to be a stickler for timelines and deadlines, the draft budget speech is perhaps already in place. And while one many wonder who Pranab Mukherjee would quote in his speech to sum up the sentiment behind the budget document, the one theme that will find a prominent place in the budget this year is fiscal consolidation. No prizes for guessing that right.
