Budgeting for growth
Barely a week before the presentation of the Budget for 2011-12, finance minister Pranab Mukherjee and the government’s macro-economic managers have their plates full.
India’s economy is stuck with major roadblocks- just when it looked like a challenger to China as the world’s fastest growing economy.
Food prices have remained stubbornly high pummelled by a supply crunch in staple vegetables. Weather problems in Australia, Argentina and Russia have hit global food and commodity prices, while oil prices have crossed $100 a barrel and these have knocked up prices of other goods.
Factory output growth has plunged to a 20-month low at 1.6% in December, policy uncertainties loom ahead of the budget, and corruption scandals are hitting political sentiment that can, in turn, hurt business climate.
People want Mukherjee to announce measures that would bring down prices immediately.
The common man also wants Mukherjee to reduce tax rates or change the tax slabs in a manner that it would leave more money in their hands.
India’s GDP is set to grow by 8.6% in 2010-11, but a possible industrial deceleration has become a cause for major worry.
Manufacturing output, which accounts for about 80% of the industrial production, grew by 1% in December.
Capital goods output contracted 13.7% in December in a sign that higher cost of credit and rising input cost pressures may have forced companies to defer planned investments.
The RBI has raised key policy rates seven times so far this fiscal year to cool prices.
Costlier loans mean costlier credit for consumers and higher expenses for manufacturers. Both could hit demand and growth.
There have been no major policy decisions in recent months because policy-makers cannot agree on critical issues. Spats between ministers and a parliamentary logjam have hurt governance.
Inclusion is very easy to write down on paper, very hard to carry out. Reaching to backward areas is not just a question of throwing food and money at them. Economic reforms are too catch-all a term to be the panacea for all problems.
Direct action of reach out to the poor is not easy. Plugging the leakages by creating a police force and bureaucracy to police the ration shops will not work as you would need another layer of bureaucracy to monitor it.
Growth alone is not going to deliver it. Markets alone are not going to deliver it.
In the final analysis, profit maximisation, policy reforms and equity should cease to be mutually exclusive objectives. Mukherjee can take solace from the fact that there is now growing self-interest and political realisation that lack of instability might come home to roost. And there is hope that growth and reforms will drive away poverty.
What are needed is intelligent reforms and intelligent design of policy as nothing is going to guarantee that you are not going to run into a pitfall.
Policy has to be designed so that the propensity for leakage comes down significantly.