Don't expect big-bang reforms this Budget: Shankar Acharya

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As the countdown to budget 2010 begins, we ask a slew of experts and industry veterans what they expect from the government and what the finance minister should do.

He knows North Block well. An economist, a Former Chief Economic Advisor to the government, a former member of the Prime Minister's Economic Advisory Council and a Member of the 12th Finance Commission. Dr. Shankar Acharya understands the art of budget making. It's time for Dr. Acharya's report card.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: How would you rate the economic performance over the last year because we have come off a fairly bad year, growth seems to be back on track of course there are worries in terms of fiscal prudence, fiscal consolidation, inflation. But on the whole how would you rate the economic performance in the past year?

A: I would certainly rate it better than what I expected on growth - no question. I think better than what most people expected and now everybody expects that it's going to be 7% or higher than that for this year, which a year ago nobody would have said that, almost nobody. There are areas where one worries and I think the one that's really worrying me most is inflation in the short-term.

The fact that food price inflation, essential commodities inflation has been in double digits now for over a years not just two-three months and I think that's real cause for concern. I do not want to come out sounding too critical because there was a supply shock and in the sense some of this probably could not have been avoided.

Q: But food inflation at 17%, a lot could have been done?

A: Exactly. I think on that a couple of things which come to mind with the benefit of hindsight one is right now food stocks for e.g. are really quite high - I think its close to 50 million tonne and the buffer stock norms are substantially lower, closer to 30 million tonne.

So one wonders why things like open market sales, which I recall we use to do 10-12 years ago whenever situation got like this or near this, have not been more aggressively perceived in order to tamp down those commodities where you do have an intervention capacity. I know you do not have intervention capacity in fruits and vegetables and whatever happens there happens. But in some of these commodities little more could have been done and it could have made a difference.

Q: The path to fiscal consolidation, do you see the finance minister moving towards that this budget. He talked about wanting to move towards that in the last budget. The stimulus seems to have worked almost 3.5% of gross domestic product (GDP) of course there were question marks on whether it was enough or no but certainly seems to put growth back on track. Do you think he is going to start a gradual withdrawal this budget?

A: I think you are being too complimentary to call it a stimulus. It was more a case of - if you go back to 2008-09 - most of it was good old populist things like just happened at the right time and then we called it stimulus but still I think it was important and helped us.

I think in terms of looking forward if you recall the finance minister himself when he placed the last budget in Parliament in July had said that for this year, coming year, fiscal deficit of the Centre should come down to 5.5% of GDP.

My own take on this would be that this coming year we have to have a little bit of fiscal consolidation otherwise there is a serious problem with our credibility - internationally, domestically - as well as it is going to create problems for management of the macroeconomy if the fisc continues to be at a consolidated deficit of 10-11% of GDP then to try and expect RBI to take care of everything is somehow just not on.

Q: In terms of missed opportunities, you have already spoken about two areas where you think the government could have done a much better job in terms of managing. But in terms of missed opportunities what would you regard as the most significant?

A: I think this whole area of 3G auction, I mean it's been going on for years now. And we must be looking a bit foolish. I can see that if I were in the finance ministry today advising the minister, I would say let's make something good out of a bad job which is to say we are not going to get the revenues this year but next year we will look better because it will slip into next year.

I think that's not the right way to look at it. The right way to look at it is here is an area where we are talking about going to 3G for two-three years and we haven't yet done it. And there isn't a clear comprehensible reason why we have not. The other area where I have been more than a little disappointed is on the whole area of petroleum pricing.

Q: Do you think the Kirit Parikh Committee report is going to do any better than the predecessors, the Rangarajan and the Chaturvedi Committee reports?

A: I certainly hope so.

Q: He talked about it in the budget. He talked about a sustainable oil mechanism in the budget. We have got the Parikh Committee report but the signals that one is getting from the political front certainly doesn't look like these will be accepted at least anytime soon?

A: I guess I'd have to agree with you. I am not completely pessimistic on this. I guess my take would be that if the general price indices particularly the commodity, food prices, essential commodity indices of prices they come down because of cyclical factors or because of measures taken in the next couple of months then around April or so there maybe some chance that you will see some adjustments of petroleum prices.