The run-up to Budget has been highlighted by the Reserve Bank of India’s Mid-Quarter Review and the Economic Survey presented by the ministry of finance. While RBI delivered on the market consensus of holding the policy rate steady and refraining from a cut, the Survey is a precursor in shaping Budget expectations. The reasons for holding the rates steady were articulated by RBI. In our opinion, of the three reasons, viz, renewed surge in crude oil prices, weaker exchange rate and widening fiscal gap, the sharp extent of fiscal slippage in FY12 emerged as a key constraint in commencing the monetary policy easing.
The Survey says the economy is set to see a turnaround in FY13, riding on an improved investment climate on the back of lower inflation and an anticipated easing of monetary policy, accompanied by corrective measures on managing expenditure. It anticipates economic growth in the range of 7.3-7.9 per cent in FY13. The Survey acknowledges that India’s current economic slowdown is rooted in domestic factors.
While, ideally, the Budget should be setting the stage for initiation of big-bang reforms to revive investment activity, with the aftermath of the state elections’ outcome, the appetite and ability of the government appears to have been compromised. Nevertheless, reforms which are more administrative in nature and readily stand to benefit state governments, such as use of cash transfer for subsidies, financial sector reforms and augmenting financial saving, among others, could see the light of the day. More important, the Budget should articulate the re-embarking on the Fiscal Responsibility Budget Management road map, to pave way for larger private sector participation in growth.
While the Budget could look at immediate measures to raise tax revenues such as restoring duties to the pre-crisis levels, widening the service tax base, etc, for a medium to long-term sustainability of tax buoyancy, early implementation of the DTC and the GST is an imperative. The under-budgeting of subsidies has been a bane for many years. More credible and transparent arithmetic on subsidy estimation is the need.
As fiscal consolidation gets back on track, savings and capital formation should begin to rise. In recent years, we have seen gross domestic savings as a percentage to GDP decline to 32.3 in FY11 from a peak of 36.8 in FY08, led by a sharp decline in financial savings, a matter of concern. In all probability, the savings rate has declined further in FY12. To achieve a trend GDP growth of eight per cent on a consistent basis, the savings ratio needs to reverse the current declining trend.
Chapter 2 of the Survey focuses on key enablers that will strengthen the economy’s micro foundations. As outlined, “There is an increasing recognition that flawed micro foundations can devastate the best of macro intentions.” Towards this end, the Survey presents some innovative ideas in the context of expenditure management on overall fiscal consolidation. It advocates a need to shift to cash transfers for food and kerosene subsidies and favours regular adjustment in domestic fuel prices, instead of the current ad hoc revisions. Towards this end, ‘Aadhaar’ has a huge potential for improving operations and delivery of services, linked to applications on disbursement of subsidies and delivery of social sector expenditure. While all these are appreciated well, this needs support from effective implementation mechanism.
FY12 was marked by growth-inflation debate. Supply-side constraints continued to drive the inflation trajectory higher and in the absence of adequate measures during the year, RBI was compelled to tighten monetary policy, while acknowledging downside risks to growth. The Union Budget for FY13 needs to deliver on two key themes – of fiscal consolidation and creating a conducive environment for revival in the investment cycle. While big-bang reforms are more than welcome, small and meaningful steps to de-bottleneck the current impediments to investment are the ones we hope for in the Budget.
Shubhada Rao, Chief Economist, YES Bank