For the last two years the macroeconomic conditions, international and national, have been severely adverse. While the overall environment may appear to have improved, the fact is that adversity has been replaced by uncertainty. To put it in market parlance, earlier the downside far outweighed the upside but now the possibility of an upside is becoming stronger.
In such a situation of uncertainty, economic policymaking is far more complex than it is in difficult times. The economic policy makers of India, be it Reserve Bank of India or the ministry of finance, did well to minimize the impact of the global turmoil through concerted monetary and fiscal measures. How well they handle uncertainty was to be seen in this Budget. This was a budget in uncertain times.
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Looking at the basic structure and the underlying theme, what was been delivered yesterday is a budget for uncertain times. What this really means is that the Budget may not ensure a quick turnaround. Instead, what it is more likely to do is to arrest or reduce the possibility of a further decline; limit the extent of the downside as it were. This is the single most important achievement of the Budget 2010.
In budgetary terms, the all-round uncertainty was getting manifested in a simple issue: demand for continuance of the fiscal stimulus. There were arguments and implications for and against this. The masterstroke in the Budget is that the fiscal stimulus has been neither withdrawn (or deferred) nor extended; the finance minister has deftly changed the nature of the fiscal stimulus. What was an enterprise/institutional stimulus has now been converted into a retail stimulus! This will help sustain a broader recovery. So in some way, by design and not by default, he has avoided the “either/or” conundrum of the stimulus exit.
The other big uncertainty which has been reduced considerably is regarding interest rates. Coming in right after the clear monetary policy stance of a hardening interest rate regime, the fiscal policy in general and the level of borrowing in particular, not just in terms of level but also in terms of size, will go a long way to cool the debt markets.
At one stage where it was certain that 10-year government paper may touch 8.5%, it is now more likely to be in the range of 7.75 - 8%. It is now almost certain that yields will stay at sub-8 levels.
However, notwithstanding the fiscal stance of the Budget, the pressure on rates is bound to come in from monetary policy action most likely to happen in April.
True, this Budget lacks the glamour of big bang reforms. But then that was not even required at this stage. Given the extant and the emerging environment, what was required was a classic 1970s budget: nuts and bolts with an eye for detail and without any grand standing and posturing.
If one is driving a car in fog, it is not likely that the wheels will be changed. What an experienced driver does is to ensure the fog lights (the size of borrowings), the front shield wipers (structure of expenditure), the tail lights (infrastructural spending), and the side indicators (personal tax rate reduction) are in order. That is more likely to get you where you want to be. Maybe a little late, but safely not bruised and battered. And that is exactly what the finance minister seems to have done.
A fairly clear road map, even if long on promise and short on delivery, a change in the nature and quality of stimulus, and a less than expected recourse to borrowings, is what has seen the markets rally so strongly.
In the current environment, it is not just the level but also the structure of public expenditure that will be a key variable and needs to be analysed in great detail.
The small but significant touches on the structure of public expenditure, overweight on infrastructure and agriculture, and plan over non-plan, will go a long way to dampen some of the impending crowding-out effects on the investment side. If delivered well, these could even crowd in private investment. Besides this, given the focus on agriculture and infrastructure, it will have a sobering impact on inflation as well.
Other than a heightened global adversity, the real threat to the Budget numbers will come from expenditure overruns which, in the true 1970s style, have been understated to show a lower deficit number. And, of course, from the rather ambitious divestment programme of Rs40,000, plus the third generation (3G) auction receipts. Give the recent experience of the NTPC (Ltd) and the REC (Rural Electrification Corp. Ltd) share sales, this does look like a vulnerable number.
To sum up, it is a creatively conservative Budget, which will not be remembered for long either for the budgetary arithmetic or for any fiscal policy initiatives. If at all, it should be remembered for restoring the balance between politics and economics in the formulation of the Budget. In the last 20 years or so, the Budget had come to become a specialist economic policy document with an overdose of intended policy interventions, stabilization measures, reforms initiatives and structural adjustment schemes.
Contrary to that, this Budget has restored the pol- itical aspect of the Budget and reasserted the fact that at the end of the day, the Budget is a document of political economy and not just economics alone. In a democracy, this must be seen as a major gain.
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