Bond prices rallied and yields dropped after finance minister Pranab Mukherjee projected a Rs3.43 trillion net market borrowing programme by the government in fiscal 2012, lower than the lowest estimates of most analysts. The most optimistic projection of 2011-12 market borrowing by the government, net of old bond redemptions, was Rs3.6 trillion to bridge a 4.8% fiscal deficit that analysts were expecting. Apart from Rs3.43 trillion dated securities, the minister has also budgeted Rs15,000 crore treasury bill auctions. The combination of bonds and treasury bills raises the total borrowing level next fiscal to Rs3.58 trillion—still lower than the market estimate. Besides, since treasury bills are short-term instruments (their maximum maturity could be one-year) nobody is giving too much of importance to this part of the borrowing programme.
With a lower borrowing plan, the government’s debt to gross domestic product ratio next year will come down from 52.5% to 44.2%. That’s good news. The bad news is that it is not clear how Mukherjee plans to achieve the projected 4.6% fiscal deficit in 2012. Where will the money come from? After all, there won’t be any windfall in the form of third generation spectrum sale next year.
Prima facie, there seems to be an underprovisioning for oil, fertilizer and food subsidies. To put the figures in context, in the current fiscal, the budget estimate for such subsidies was Rs1.09 trillion, but that has gone up to Rs1.54 trillion. For 2012, the budget document has provided for Rs1.34 trillion as subsidies for food, fertilizer and oil—Rs20,000 crore less than what is being spent in the current fiscal. With oil prices going up, it is highly unlikely that the government will be able to stick to these figures. The overall provisioning for all sorts of subsidies in 2011-12 is estimated at Rs1.44 trillion, again Rs20,000 crore less than the current year’s Rs1.64 trillion.
The government can achieve its ambitious 4.6% fiscal deficit target only if the growth momentum in the Indian economy continues and there is buoyancy in tax collection. To that extent, this budget is a big gamble on growth. At this point, Mukherjee’s proposals on direct taxes will lead to a revenue loss of Rs11,500 crore and indirect taxes will mop up additional Rs11,300 crore, leaving a net loss of Rs200 crore.
Except for the fact that Mukherjee has refrained from rolling back excise duty, from 10% to 12% (it was reduced in the wake of the global financial crisis to ensure industry continued to grow), there has not been any significant measure announced in the budget to combat inflation. Indeed, the finance minister has spoken about investment in cold storage chains, increasing bank fund flows towards agriculture and a series of granular measures to address supply bottlenecks and tackle food inflation but none of them is a novel and aggressive initiative to seriously fight rising inflation.
Instead of taking fiscal steps, Mukherjee has passed the ball to the Reserve Bank of India’s (RBI) court when it comes to tackling inflation. He has also said that monetary policy measures that have already been taken are expected to further moderate inflation in coming months. RBI, in its quarterly monetary review in the last week of January, raised its key policy rate by 25 basis points, the seventh hike in the current fiscal, to 6.5%. It will probably raise it again by an identical margin in March, but the central bank will probably not be as aggressive as it would have liked to be on this front next fiscal year, knowing well that the main plank of Mukherjee’s budget is growth. Aggressive rate tightening will derail the apple cart of growth and if that happens, the projected 4.6% fiscal deficit target will not be achieved.
Tamal Bandyopadhyay is Deputy Managing Editor, Mint