Expert Zone

Straight from the Specialists

Budget assumptions to get severely tested

March 2, 2011

(The views expressed in this column are the author’s own own and do not represent those of either Principal Pnb or Reuters)

Every evening when I leave Bandra Kurla Complex (BKC), the plush new financial district of Mumbai, which incidentally in a very symbolic manner is surrounded by slums on one side and a swamp on the other, I am quickly reintroduced to the harsh reality of Mumbai at BKC’s exit traffic signals.

Whilst I patiently wait, in keeping with the true Mumbaikar spirit, I watch the traffic lights turn red, to yellow and green, many times over till I finally get my turn to make the 200 meter dash for the Western Express Highway.

When I do eventually make it, I am not certain of my emotions because they are a mix of relief, frustration and, sympathy for the lone traffic constable. This is what I would also say for Budget 2011/12.

The gyrations in the Sensex on Budget day when it went up by 600 points and finally settled 122 points higher, and the next day when it surged 600 points, promises the year 2011 to be a journey in fiscal discovery.

Our Finance Minister, who should not be envied for his job, has very aptly made all the correct statements of intent about balancing growth with financial inclusion and forging ahead with fiscal consolidating initiatives like DTC and GST.

I however remain unconvinced that, the three key issues facing the Indian economy: growth, inflation and fiscal consolidation have been sufficiently addressed.

From the looks of it, the RBI has been left out on a limb to combat the raging inflation which is primarily driven by food prices and impacted to a lesser extent by monetary policy than structural changes in productivity of protein supplements. One can easily see policy rates going up with RBI’s tight money policy placing industry margins under pressure.

However, the real gap in my understanding remains in the area of fiscal deficit.

The 2010/11 Fiscal deficit estimated at 5.1% is down to an impressive 4.6% of GDP. If one was to provide for the telecom licence sales, the 2010/11 should be in the vicinity of 6.4%. The math simply does not add up.

Oil subsidies could be the swing factor considering the current political scenario because even at USD 90 per barrel, they could be at least double the provisioned Rs. 24000 crore.

The National Food Security Bill will be introduced this year but its costs have not even been estimated. The NREGA and food subsidies do not provide for the impact of inflation.

Therefore I believe, the Budget’s key assumptions of growth at 9% and Inflation at 5% leading to a nominal GDP growth of 14% are bound to get severely tested during the course of 2011.

Having said that, the treats handed out by way of an increase in IT exemptions to all especially senior citizens, farmer loans, Anganwadi workers, handloom weavers should hopefully keep the aam aadmi favorably inclined over the next couple of months when 5 states take to the polls.

In his own words “At times the biggest reforms are not the ones that make headlines, but the ones concerned with the details of governance, which affect the everyday life of the aam aadmi” and in keeping with this the FM has indeed listed a host of governance initiatives significantly the UID, the cash transfer of subsidies and funding for that elusive infrastructure.

I will be the happiest Indian when all these initiatives get executed because, when I am crossing that BKC traffic signal in a highly taxed car, I never like to miss the aam aadmi struggling equally, albeit on foot, to get across that same road to take an always over crowded local train back home.

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