Every budget is a struggle between economics and politics, and there is no reason to believe that the one finance minister Pranab Mukherjee will present today will be any different.
A lot of hopes have been raised by the reformist Economic Survey released on Thursday. But the link between such a survey (which is penned by the economists in the finance ministry) and the actual budget (which reflects the demands of powerful political and special interest groups) has mostly been a tenuous one.
Mukherjee will have three sets of pressures, and will need his famed political skills to negotiate them. The first set of demands comes from business lobbies and the financial markets, which are expecting big-ticket reforms, higher infrastructure spending and, perhaps, tax cuts. The second set of demands comes from a United Progressive Alliance that has come to believe that initiatives such as the rural jobs scheme and the farm loan waiver won it the general election. The third set of demands comes from economists and international credit rating agencies that worry about India’s growing fiscal and public debt burden.
Illustration: Jayachandran / Mint
It is likely the finance minister will try to partially satisfy everybody and thus run the danger of satisfying nobody.
It is our view that there is only one way out of this confusing maze: higher economic growth.
The Indian economy has done creditably these past few quarters despite the sharpest fall in global economic activity since the Great Depression of the 1930s. But India has held its own largely because of a rescue act by the government. Higher government spending kept the economy on track after consumer spending, business investment and exports dropped. This rescue act comes with a frightening bill: a fiscal deficit that is at levels not seen since the 1991 economic crisis.
India is likely to grow at 6.5-7% this fiscal, assuming the monsoon behaves itself. That will still be at least two percentage points below what India grew at during the recent economic boom. Regaining those two lost percentage points is critical.
Why? High growth will throw up the tax revenues needed to simultaneously bring down the fiscal deficit, fund schemes to help the poor and help revive consumer and business confidence.
The budget alone cannot propel the economy back to its old heights. But a clear road map of future reforms and a time-bound programme to bring public finances back into safe territory is a must.
In short, what India needs right now is a reforms push rather than a fiscal push.
What kind of budget does India need? Tell us at email@example.com