Budget 2011 was presented amid a generally optimistic growth outlook, with notable improvements in private savings and investment rates, as well as a resumption of private consumption demand.
The government has delivered on the task of elevating GDP growth rate from 8% (FY 2010) to 8.6% (FY 2011), while bringing down the fiscal deficit to 4.8% of gross domestic product (GDP). A better-than-expected monsoon resulted in the agricultural sector growing at 5.4% from an annual growth of merely 0.4% last fiscal. Domestic capital markets performed well in 2010 with primary markets financing at record levels, including the largest-ever initial public offering (Coal India Ltd).
However, the economy is faced with a number of challenges that may act as speed breakers in the future growth momentum being predicted. In an increasingly interconnected and uncertain world, India’s future in the coming years will be determined based on the interplay of a number of factors. A glaring trend observed this fiscal is the emergence of inflationary conditions, which may become structural.
The rise in demand, coupled with strong supply bottlenecks, is a catalyst for inflation, which is one of the growing concerns today.
Although fiscal deficit is on a declining trend, the size of the consolidated deficit, including states deficit and the off balance sheet items, is at an unacceptably elevated level of 10% of GDP. The size of the current account deficit is also a cause for concern, particularly since capital flows have been volatile and the financing of the deficit through the services exports seem unpredictable.
Finally, global uncertainties arising from unstable geopolitical conditions, lack of coordinated policymaking and uneven growth and unemployment also pose significant risks to India’s growth story.
The finance minister presented the budget amid this dual environment of high growth prospects and short-term uncertainties. Overall, the policy prescriptions outlined were lacklustre and can be considered more of tinkering around the edges without ushering in radical reforms. From a big picture perspective, it sends a signal that the general direction in which the economy is headed is on course to deliver high growth, and therefore, does not warrant any significant course correction. A consistently high future growth rate for the country is intrinsically dependent on productivity in agriculture, industry and services. In this context, the focus on improving the rice-based cropping system, as well as other agricultural products announced in the budget, is noteworthy. Increased outlays on education, both at the secondary level as well as skill-based education, is a step in the right direction that will enable India to take advantage of the demographic dividend that will manifest itself in the next two decades.
Another commendable feature is the government’s intention to finance the fiscal deficit through the issue of treasury bills rather than market borrowings, which would have crowded out private investments. Continuing on its focus on infrastructure development, the government has provided the much-needed thrust to this sector by creating infrastructure debt funds and by proposing to issue tax-free bonds of Rs300 billion.
The focus on the corporate bond market is also relevant. The budget has raised the foreign institutional investor limit in five-year corporate bonds for investment in infrastructure by $20 billion. All these changes will reinforce the growth momentum and help the economy continue on its proclaimed high growth trajectory in the medium term.
Overall, the budget is pro-growth but does a good job in balancing the priorities of growth versus other social sector priorities.
Shanto Ghosh, senior director, Deloitte Touche Tohmatsu India