Budget 2012: Experts hope FM restores confidence in economy

Q: There has to be some criticism about the sheer number of projects awarded as well. The NHAI has been very active this year, but otherwise there has been no substantial increase especially in PPP projects?

Maira: There was a young reporter who came in and pulled out from the RBI a statement about the overruns on infrastructure projects, power projects, atomic energy projects and a whole host of other large infrastructure projects going down the whole list. It is quite staggering the overruns on our projects. He was relating it to time - that you announce something and you don’t get it done in time does that cause overrun?

I said - of course that causes an overrun and time is also money. But more importantly if the thing was done, it would produce some benefits which would stimulate the economy. So, we are losing both ways by not getting things done on time. So, this is again nothing to do with the finance minister or the Budget itself. He would have to request reforms in other areas which will enable then the Budget to produce the results that you would offer.

Q: Are you saying infra may not necessarily get addressed to that degree, but it’s the backlog that needs to be fixed?

Maira: What would you have to do to fix the backlog? Who has to do the things that would fix the backlog?

Q: The PMO is trying of course, on power at least. The one person who will have to show some magic is the RBI governor. How tough is the situation as you see it from a monetary point of view? How easy would you say is it right now to say - okay you want a repo rate cut, here it is - 50 basis points, maybe that will stimulate the economy?

Jalan: Every year there are dilemmas. If you look at last year it was increasing the rates, now it is lowering the rates, there is growth, inflation, first was very high and now becoming low. So I don't think the RBI can act as a magician, it has to balance the considerations. Today, inflation has come down and the most important priority is really to instill confidence among investors and take measures to boost growth.

There the RBI has a very partial role because if there is no confidence in the country, your interest rate maybe 2%. In some African countries it is 3%, 3.5% who would invest. People were investing in our country when the interest was about 13%. The point I am making is go to the root of the problem and let's not just go to the surveys because things are not about fiddling with say 0.75% basis points or 1% basis points etc. Yes, these are important, but at the moment they are minor, if I may say so.

Q: The fear is that stripped off any fiscal impetus or any strict policy action on the fiscal side, the RBI's hand get tied and both the quantum and the timeline by which they can actually start moving on rate cuts to help the economy may get shifted back and may get crunched down as well. Would you say that would be the tricky path to take this year?

Jalan: Fiscal deficit is high, yes, all of us are concerned about fiscal deficit, but all said and done you are now talking about say some decimal points, maybe 10 decimal points at the most. That's not the critical issue at the moment. We are all worried about fiscal deficit. It would be nice if fiscal deficit was low, but the more important than the size of the fiscal deficit is where the fiscal deficit is going.

Is it going into infrastructure, is it going into constructions, is it going into highways, is it going into ports, is it going into power. Why don't we ask ourselves these questions rather than asking the same sort of questions that we ask whether things are going well.

Q: You said there was a lack of believability in the figure the last time around. What would make you more hopeful that whatever target he sets out this time seems more achievable because the last time he had much less allocation in term of subsidies, he expected a whole lot more from divestment proceeds. What kind of details would you look for in that fiscal deficit figure?

Acharya: Apart from the broader considerations that Dr Jalan mentioned earlier there is one other dimension of broader considerations which whoever, the Finance Ministry and the Finance Minister I hope is very seriously considering in making this Budget, which is that the external environment this year is very uncertain. All those who heaved a sigh of relief on some deal on the Euro-Greek bailout etc, I think are whistling in the dark as the year unfolds because there is many a slip between cup and lip and what happens there and also the whole political situation with respect to Iran where anything could happen.

It's not that I am predicting something will happen, but these are two obvious areas of very great uncertainty in the international environment. This is against a backdrop where I feel that our external vulnerability at present is probably at it's greatest in the last 20 years since the early 1990s. If you look at the size of our trading deficit, if you look at the current account deficit and the balance of payments has been, our external borrowing and so forth.

Against that background it becomes much more important to give a credible signal on the fiscal side and it has to be credible not only in terms of a particular number, but the sort of thing is if he is going to show a small petroleum subsidy that's not going to be believable unless he lays out a roadmap for increasing prices of the key petroleum distillates.

If that is not politically feasible now and it's quite easy to argue from some quarters that it is not, then better to put a large amount in the petroleum subsidy and do whatever else you can. Otherwise people will just lose all faith.

Q: There is a committee recommendation in place in terms of what to do with petroleum products. Do, you expect him to address it at all or circle it?

Acharya: I was hoping that would happen even before the Budget. The old practice, when Dr Jalan and I were in the ministry was we would try to get the administered price increases in before the Budget because no finance minister likes to give a Budget speech which announces administered price increases. But, for whatever reasons that hasn’t happened.

Now you can read that two ways. One it hasn’t happened before, it’s not going to happen now. The other is in a sense that he has been pushed into a corner of having to put in the Budget. If he doesn't put it in the Budget and it sort of remains out there as a hope for the future.

I don’t see oil prices coming down in a hurry, especially, not in the current uncertain environment in West Asia then you will just have to show a largish allocation for petroleum subsidies and work around that. This means you have to raise revenues elsewhere or do more credible cuts in expenditure elsewhere. So, it’s going to be a very difficult situation.