One of the reasons for the slow growth witnessed in the past year has been the adverse monetary and fiscal policy mix in the country. If there was one thing that the 2012-13 Budget was expected to redress, it was the adverse policy mix. The Reserve Bank of India (RBI)—both in its third quarter and mid-quarter review of monetary policy—had highlighted the importance of right fiscal conditions in shaping the inflation outlook and, implicitly, the speed of monetary loosening in the months ahead.
Has the budget addressed this issue properly? Does it create enabling conditions for a return to a high growth path in the years ahead? It is not that the finance minister’s intent is doubtful, it is the poor credibility of his numbers. This is both on revenue and expenditure sides. On both counts, the budget’s ambition runs way ahead of realities. In recent days, the numbers have been dissected and need not detain us.
But two broad categories stand out and both show signs of the same mistakes made last year. One, the sums expected from non-tax revenue—0.6% of gross domestic product (GDP) from spectrum sale and telecom fees and another 0.3% from disinvestment. And two, the nearly 9% reduction in non-plan expenditure in 2012-13. In 2011-12, the last item showed a slippage of 9.3% over the budgeted amount. Both figures leave a huge room for uncertainty and in policy terms. What RBI will look for before it cuts rates is the inflationary potential of the budget. And slippages in non-plan expenditure and realization of non-tax revenue have a tremendous potential for inflationary creep via rising fiscal deficit.
It is quite unrealistic to expect RBI to be aggressive in the matter—the central bank had repeatedly raised the issue but it was not addressed in a satisfactory manner. The government may still be able to fix things, but the time it has on its hand makes the medicine very bitter. Charging high prices for fuel products, compressing other expenditures and realizing windfall non-tax revenue all in the span of a single year is too much to ask. They do not make the right ingredients for growth.
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