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Straight from the Specialists

Budget 2013: India has no room for a populist budget

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(Any opinions expressed here are those of the author and not of Reuters)

It is still a good year into the next general elections, yet India’s two main political parties have already set the stage for a showdown. The opposition Bharatiya Janata Party is closing in on the Congress party, according to opinion polls. Even though it is still early days, this puts even more pressure on the ruling party.

Last autumn, the Congress had a change of heart with its policy priorities, having realized that dithering on industry reforms would be a safer way of losing votes than pushing ahead with unpopular measures. It ploughed through opposition to liberalize foreign direct investment, and it mainly succeeded, although progress on fiscal housekeeping, such as raising power tariffs and cutting diesel subsidies, has come at a much slower pace. Other potential measures did not happen at all. Nonetheless, the party has raised hopes and expectations that it can get India’s act together.

When the government announces the budget for the new fiscal year on Feb. 28, it could be a platform to show that it has the long-term thinking to do the right thing and forsake the traditional, populist, pre-election budget the country can now ill-afford. Not only is India’s economic growth far below potential at this point; perhaps more important is that price inflation, which could trigger mass discontent anywhere in the world, has reached uncomfortable levels.

History has shown that inflation becomes an issue when a government increases borrowing and the central bank monetizes a large part of this debt, effectively bankrolling spending by printing money. The Indian government now has a choice between handing out unearned goodies and jacking up price expectations, or exercising discipline and helping keep inflation in check, ultimately supporting growth and job creation.

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