There is an element of unreality to the “business as usual” manner in which the authors of the budget have presented it, and sundry commentators have examined its contents. There is hardly a government worth the name in power which, on current reckoning, will be able to put any major decision through Parliament, irrespective of whether it be bitter medicine or not. Yet the Union finance minister has used the words of Hamlet to argue that he has decided to be cruel in order to be kind. And economists and analysts have dutifully parsed his words and dissected his numbers to pronounce judgement on them.
How seriously the budget numbers are to be taken can be gauged from a quick look at the subsidy bill. Major subsidies are set to go down by 14 per cent in the coming year (2012-13) when in the current year (2011-12) they have gone up by 27 per cent. This miracle is going to be achieved mainly by lowering petroleum subsidy by 36 per cent when it has gone up by 78 per cent this year.
Is this realistic, when global oil prices are riding high at the moment, and it has been assumed that they will average out over the year at above $115 per barrel? Obviously, it has been assumed that major rises in diesel prices will be put through in the current year — never mind the fact that the railway minister is set to lose his job because he chose to raise passenger fares by a small amount.
This is not all. The food subsidy bill has gone up by 14 per cent in the current year. Yet, in the next year, it is projected as rising by only three per cent, despite the impact that the food security bill could have on the amount. The subsidy scenario assumed for fertilisers is also hugely optimistic. It went up by eight per cent in the current year but is projected to go down by nine per cent in the coming year.
This is not all. The budget has made a major assumption on inflation. It expects that it will go down a little from present levels to a little over six per cent. This is strongly predicated on two imponderables. First, on stability and moderation in global commodity prices, which are appearing to firm up; and, second, on domestic food prices, which depend on the weather. On both these fronts the final news by the end of the year may be positive — but the government has little control over the outcome. You can pull almost any number out of a hat, but do precious little to try to ensure that the outcome comes near it.
The real bitter medicine that the finance minister has courageously administered is to raise indirect taxes across the board, in both service tax and excise, by two percentage points. This is bound to have an inflationary impact through the economy and puts a further question mark against the assumption that is made about the moderation of inflation. But the move has the virtue of being a responsible attempt to rein in the fiscal deficit, when expenditure cannot be curtailed beyond a point.
What is, however, most likely to happen is that the deceleration in the inflation rate witnessed in the last few months is likely to be halted, at least temporarily, courtesy the across-the-board rise in indirect taxes. Seeing this, the Reserve Bank of India is likely to go easy on any action to lower interest rates, in line with its inaction in the latest review of monetary policy. If we note that the deceleration in the growth rate over several quarters to as low as 6.1 per cent in the third quarter of the current year was critically due to the central bank’s anti-inflation policy of dear money — and that a cheap money regime may not arrive in a hurry — then how will the growth rate go up to 7.6 per cent next year from this year’s 6.9 per cent? And, without higher growth, what happens to revenue buoyancy and correction of the fiscal balance?
To set against this scenario of uncertainty, there is one major, and one moderately good announcement in the budget. Foremost is the decision to hike the allocation for the Aadhaar or unique identification number project. It is hoped that this will go a long way in enabling the payment of subsidy directly to the poor, thus eliminating a lot of leakage. Though the rollout and use of the mechanism will take time, we can see some light at the end of the tunnel.
The other positive announcement is the package of measures to facilitate investment in infrastructure. These seem to add up to something meaningful, and could well produce positive results but only over time.
Overall, the scenario painted in the budget is wholly speculative mainly because the government has little control over it. It will earn some political respite by lowering direct tax rates marginally (the Trinamool Congress has described the budget as neither good nor bad) but that will not be enough to allow the opposition and estranged members of the ruling coalition to allow UPA-II to complete its term. Thus Budget 2012 hardly has greater real-life relevance than a management game.
