Finance minister P. Chidambaram will kick off his formal pre-budget deliberations today, ahead of what will be the fifth general budget of the Congress-led United Progressive Alliance (UPA) government and his seventh as the Union finance minister.
Traditionally, the finance minister meets four interest groups before the budget is finalized and this year he has decided to first meet the agriculturists, then the trade unions, industry groups and economists.
Exercise begins: Union finance minister P. Chidambaram.
In the first general budget since the approval of the ambitious 11th Plan, 2007-12, and the last full-fledged budget before the next Lok Sabha polls, the finance minister faces twin challenges: Sustaining growth rates in the economy in the face of an imminent global downturn and providing sufficient funds for a slew of new social sector programmes that would assist the political prospects of the UPA.
Not an easy task, given the mixed macroeconomic backdrop.
While India's economy is expected to post a growth of around 9% in 2007-08, after a spectacular growth of 9.4% in 2006-07, and with direct tax collections having soared 42.30% between April and December 2007, there are growing concerns around rising food prices and burgeoning government expenditure.
With the Centre's unwillingness to pass on increased fuel costs to consumers, even as oil prices have jumped to $100 (Rs3,930) per barrel, the Centre’s liabilities have risen by Rs30,000crore, owing to higher fertilizer subsidies.
Most of these expenses have been kept off-budget, by issuing long-term bonds to finance them, and their inclusion would show up a less than rosy fiscal outlook in 2007-08.
Rising food prices are hurting home budgets, even while higher interest rates have begun to squeeze consumer demand. At the same time, the 12.3% appreciation in the rupee in 2007, the highest since 1974, has dented exports.
Meanwhile, having lost power in Punjab, Himachal Pradesh and Uttarakhand, and having failed to make a come back in Uttar Pradesh and Gujarat, last year, the Congress party is desperate for electoral success.
Even before the general elections, due next year, the party has to face the challenge of state elections in Karnataka, Chhattisgarh, Jammu and Kashmir, Madhya Pradesh, Delhi and Rajasthan later this year.
This, analysts say, practically rules out tough economic decisions, such as a reduction in subsidies, which can alienate the voters further.
“Unfortunately, it has become a standard, if mistaken practice to be populist on the eve of elections,” said analyst B.G. Verghese, a visiting professor at the Centre for Policy Research, a New Delhi-based non-partisan think tank. “It is a mistaken practice because populism hurts the economy and does not ultimately benefit the voters. If the government continues to keep the fuel prices artificially low, for instance, it will only succeed in delaying the shock to the voters, not in averting the shock.”