Budget 2010: Time for annual guessing game
It’s a laudable effort that often gets more brickbats than bouquets. This year, when Finance Minister Pranab Mukherjee presents the Union budget in parliament on February 26, he will walking a tightrope between managing ballooning fiscal deficit and supporting economic recovery in Asia’s third-biggest economy.
Expectations from the finance minister, as always, are high — people and corporates want more in their pockets. There has been no let-up in the rise of food prices and most middle-class families still have to wait for annual sales to get branded products home.
In other words, the nation would like to see changes in tax rates, consumables getting cheaper and credit continuing to be available easily.
When the world was teetering on the brink of recession, the UPA government had introduced three stimulus packages of tax cuts, higher spending on public projects and increased liquidity in the financial markets through an easy monetary policy of the Reserve Bank of India. These policy measures helped shore up India’s faltering economy and put it back on a growth path.
The incentives which were passed on to some sectors of the economy are still in place and experts say it is time for a gradual withdrawal.
The Congress-led government has been reassuring people that growth will not be derailed by any decision to withdraw stimulus, but analysts say it is treading a thin line between supporting the economy and inflaming inflation.
The government has pegged GDP (gross domestic product) growth for 2010-11 at 7.2 percent, up from a six-year low last fiscal, and said efforts will be made in the budget to lower fiscal deficit which is at a 16-year high of 6.8 percent of GDP.
Manufacturing too is forecast to grow 8.9 percent, a sharp rise from the 2.4 percent in the previous year.
A withdrawal of stimulus would mean taking away the incentives given to sectors like exports, textiles, manufacturing and infrastructure, which in turn would lead to tighter credit and escalation in prices of raw materials.
The RBI, which till now has resisted raising its key interest rate, is expected to do so in the coming months. This would make loans costlier for the common man and could subsequently lead to a decrease in demand for the realty sector and a fall in consumption.
It’s a delicate balance that the government must get right, but whether Pranab Mukherjee will introduce populist measures or toe a practical line and respond to the existing financial situation, is anyone’s guess.