Budget to underline slow pace of reform

Budget to underline slow pace of reform

New Delhi: The government presents its first full post-election budget on Friday, with a lack of political appetite for big-bang reform set to disappoint those looking for bold moves to open up the economy.

The ruling Congress party had frequently blamed its Communist partners for thwarting attempts to reduce state control of the economy during its last term, when it led a fragile coalition from 2004 to 2009.

But although the left-leaning Congress is now firmly in control, it will shy away from contentious moves to liberalise India’s still inward-looking economy in the budget for the fiscal year ending in March 2011, analysts say.

Also See Mint’s complete coverage of Budget 2010

Although growth has rebounded—it is seen hitting 7.5% this year, then accelerating to 8% or more—the Congress is unwilling to chart a reformist course for as long as the global outlook remains uncertain.

More broadly, there also still appears to be a lack of consensus in the ruling party and its coalition partners in favour of deeper reforms in Asia’s third-largest economy.

“There’s a substantial body of opinion that believes India was saved from the worst ravages of the global slump because its economy is not so integrated with the rest of the world," said economic analyst Paranjoy Guha Thakurta.

And 74-year-old finance minister Pranab Mukherjee, known as one of India’s canniest politicians and firmly in the left wing of the Congress party, is not generally viewed as an advocate of economic liberalisation.

India’s growth slowed to 6.7% last year from boom levels of 9% as a result of the worldwide downturn, but that was seen in the country as a good performance compared to anaemic expansion or recession in the west.

Most economists tout liberalisation to pull in foreign investment as the best way to boost growth and ease grinding poverty. More than 40% of India’s 1.2 billion people still live on less than $1.25 a day.

But moves such as opening the vast retail and financial sectors to foreign investors, privatisation and introducing flexible hiring-and-firing laws appear a step too far for the government.

“What happened in the US and Europe has made politicians in India and everywhere more guarded about introducing measures to liberalise the economy," said HSBC senior economist Robert Prior-Wandesforde.

The country could expand faster with more reforms but even without them, he said, “India can grow at 7-8% or higher (annually) over the course of an economic cycle."

Political commentator Parsa Venkateshwar Rao added: “With the international financial crisis, this is the wrong time for anyone to talk about reform."

India’s robust upturn, fuelled by buoyant domestic demand, will give Mukherjee leeway to start rolling back stimulus steps put in place to help shield the economy from the slump, analysts say.

But the government has repeatedly stressed that stimulus exit will not be at the cost of growth.

Mukherjee will seek to satisfy political allies with populist policies while also pacifying the debt market by taking the first steps to rein in the ballooning deficit by re-embracing fiscal discipline, analysts say.

Big public spending schemes will be kept, including hikes to a flagship rural sector jobs scheme, along with heavy investment in infrastructure and education—seen as cornerstones of development.

Most of the avenues for fiscal consolidation are expected to be through bigger tax collection due to faster growth, a widening of the service tax net, divestment of stakes in state-run enterprises and the sale of spectrum for third-generation telephony.

Analysts are betting the budget deficit will fall to 5.5-5.9% of gross domestic product from its current 6.8%, a 16-year high.

Still, if the government fails to take any bold steps now, some say a window of opportunity might shut. This year is the only one in which there are no major state elections to preoccupy the Congress party.

“If they don’t do it now, they won’t do it (at all)—elections will start coming into the picture and voter considerations will take over," said D.K. Joshi, principal economist at Crisil Ratings.