Almost all media and businessmen quite unanimously praised Pranab Mukherjee’s 2010 Budget. The finance minister said he had three basic challenges: to revert to high GDP growth, eventually to double-digit figures; make it inclusive; and transform government systems and institutions to improve public delivery mechanisms. He mentions double-digit inflation as having gathered momentum since the flare-up of global commodity prices before the financial crisis in 2008, accentuated by erratic monsoons and drought that reinforced the supply side bottlenecks in some essential commodities. This has now set up inflationary expectations that are being transmitted to other non-food items.
This was a politicised explanation to cover failures and, especially, the important ministries with Sharad Pawar—agriculture, food and civil supplies. The deficit has been a worry for many UPA years. Pranab has been transparent about the numbers. These deficits created a wash of liquidity and must have pushed up prices. Pawar talked up global commodity prices when India was short of wheat and sugar. Ample wheat stocks were not used to change market sentiment. Imported stocks of pulses and sugar are said to have lain uncleared despite skyrocketing prices.
The missing dog in the budget speech is any measure to tackle inflation. There are measures to stoke it further. The excise duty on petrol and diesel will benefit the central exchequer. Oil companies will raise consumer prices, affecting freight rates and prices of many essentials. When implemented, the Kirit Parikh Committee recommendations to free petro-product prices will further fuel inflation. These increases could have waited for the next (hopefully improved) crops. Admittedly, these subsidies must go. But did it have to be now, amidst rampant food price inflation extending to non-food prices? The budget’s tax sops to the middle classes could have waited for inflation to dampen—instead, they held up the excise duty hike.
The rest of the budget adheres to the FM’s objectives, namely to stimulate growth, make it inclusive by improving opportunities for education and better healthcare and improving delivery of services by government agencies. Inclusive growth is to be achieved with 37 per cent of total expenditures on social sector schemes. But each of them (NREGA, Bharat Nirman, SSA, NRHM) suffers from poor administration—unspent money, poor targeting, leakage of funds etc.
The FM says that improved delivery must await the introduction of UID numbers in 2011 and implementation of recommendations of the Administrative Reforms Commission. The Third Finance Commission recommends setting aside substantial funds directly for local authorities. If implemented, accountability and delivery of social services might improve. The Third Finance Commission has recommended the “systemic, structural and institutional” changes that the FM wants for improving the delivery system. The UID number could transform the delivery system, as would the introduction of IT into tax administration. The ARC recommendations, if implemented, could make our bureaucracy efficient and accountable. Does the government have the determination to proceed with them?
Arithmetic suggests the budget assumes nominal GDP growth of 14 per cent, real growth of 7.5 per cent, wholesale price inflation of 6.5 per cent, and a transparent drop over five years in fiscal deficit and public debt to GDP. Infrastructure is to get 46 per cent of total plan allocation; agriculture and rural development also have substantial allocations. Public investment will drive growth, as in 2009.
Reform now puts priority on private investment. But many factors—inflation and rise in interest rates; volatile FII inflows and zooming stock prices that add to rupee liquidity, further fuelling inflation—might prevent this. Euphoric businessmen may hold back investments when they realise that the deficit reduction is not because of conscious tax and expenditure reform, but massive disinvestments and the one-time revenue from 3G auctions. That makes it tougher to achieve reduced public debt by 2015 and deficit reductions to 3 per cent. Services might be hurt by terrorism and double-dip recession in the global economy might hit services exports.
Reform, after all, requires firm actions. This budget is more transparent in its numbers, politically fudges some weaknesses, reduces deficit with one-time revenues and does not tackle fundamental weaknesses that cause inflation. Venal or inept coalition partners controlling key ministries like agriculture, civil supplies, telecommunications and railways hold reforms back. Budgets must demonstrate means and determination to convert intent into strict practice. Without them we are condemned to uneven growth, inflationary pressures and growing inequalities.
(Rao is former director-general, NCAER)
