In usual times, a pre-election budget would be aimed at propelling consumption demand. However, the prevailing circumstances denote a new normal for India. Fiscal consolidation is a priority today and the finance minister will like to build on incrementally positive measures announced so far.
By Nitesh Ranjan
Chief Economist, Union Bank of India
India today faces problems of twin deficits - high fiscal deficit and unsustainable level of current account deficit. Besides, there is a widespread perception about slackness in clearances of projects at government level. International credit rating agencies have already issued warning that India may be downgraded to junk-status if fiscal consolidation is not addressed in a timely manner.
Even though domestic growth is at bottom of the last ten years, choice for the government is limited. Therefore, the number of measures announced by the government since September last year deserves appreciation. These measures including the most recent partial deregulation of diesel prices have improved the sentiments within the country and of international investors.
In usual times, a pre-election budget would be aimed at propelling consumption demand. However, the prevailing circumstances denote a new normal for India. Fiscal consolidation is a priority today and the finance minister will like to build on incrementally positive measures announced so far. Thus, the central focus of the Budget 2013 will be on presenting a reliable estimate of fiscal deficit.
The minister has been able to contain the deficit so far and it is expected that revised fiscal deficit estimate of 5.3 percent is more likely to be achieved. Unless it happens, credibility of any estimate of fiscal deficit in the forthcoming budget will be minimal. This means no populist schemes that may demand huge expenditure from constrained coffers of the exchequer and limited scope for reduction in burden on individual taxpayers.
This year's budget is important but not very significant. Importance lies in the fact that everyone is waiting to see how the finance minister takes forward his promise of fiscal consolidation roadmap. If he presents a credible estimate of fiscal deficit of 4.8 percent, markets and rating agencies will welcome it. However, the very next day, the budget will be a non-event, and that is why this year's budget is not very significant.
There is a need to look beyond the immediate obsession of having a unique number, like the fiscal deficit as percent to GDP, conveying all that matters for policy. The quality of fiscal adjustment is no less important than containing the quantum of deficit within the acceptable range.
In the expenditure compression course pursued in current fiscal, the axe has disproportionately fallen on capacity creating plan heads of expenditure which have impact on medium term growth potential of economy. The upcoming budget therefore, needs to be closely watched for the quality aspects of consolidation too.
A credible fiscal deficit is the necessary condition for India but not a sufficient condition to bring the economy back on growth path. The sufficient condition lies beyond the budget. It is the revival of animal spirit that will matter in India's recovery from dead-low growth point.
The cabinet committee on Infrastructure has met just once so far without any conclusive move forward. Unless investment climate is revived through faster clearances and approvals of projects, economic activities may remain subdued. So all eyes on the budget but better hopes lies outside the budget.
(Views are personal)