The season of realistic growth numbers has just started. Last week, the Reserve Bank of India (RBI) said growth in 2011-12 would be in the range of 7.4-8.5% (baseline figure 8%). A few days later in an interview, the chairman of the Prime Minister’s economic advisory council, C. Rangarajan, said he expected 8.5% in FY12. Even finance minister Pranab Mukherjee issued a downbeat number. His revised estimate is 7.5-8%.
It is interesting that barely two months after the confident air of the 2011-12 budget one that had forecast growth at 9% plus or minus 0.25%—that number is being given a haircut of anywhere from 0.5 to 1 percentage point. Clearly, the confidence was misplaced. Even if one leaves aside the issue of potential gross domestic product (GDP) growth, the government did not pay sufficient attention to two issues. One, the inflation assumptions behind the 9% growth number, and two, the surging prices of commodities, including oil.
RBI spelt these out clearly last week in the monetary policy statement for 2011-12. It made an 8% growth forecast based on the assumptions that there would be a normal monsoon and oil prices would remain around $110 per barrel during the year. It also issued an inflation number of 6% with an upward bias.
Inflation and oil prices are key assumptions behind any GDP growth projection. On both counts, the budget was overtly optimistic. At the time of the budget, the April-December (2010-11) average annual inflation figure stood at 9.4% (year-on-year). In his speech, Mukherjee said inflation would be lower in 2011-12 than what it was in 2010-11. With hindsight, this combination of growth and inflation appears to be untenable now.
Some shaving off in growth may not be a bad thing to cool prices in what is unarguably an economy with many signs of overheating. The question now is what will happen to the budget’s other big ambition: fiscal consolidation. Mukherjee has planned perhaps the single biggest fiscal correction in Indian history: from a fiscal deficit of 6.7% (excluding sales of one-off items) to 4.6% of GDP. If growth slows, chances are that there will be shortfalls in revenue that will make it difficult to achieve this target even if the finance minister manages to compress expenditure—albeit that is always subject to political expediency. While these are early days and hard numbers will only be available after the second quarter of 2011-12, if the present projections are anything, this has the making of a hard target.
Did the 2011-12 budget get its assumptions right? Tell us at firstname.lastname@example.org