By Parteesh Kaul
Financial Year 2007-08 is rolling to an end, and at first glance it seems that the Indian government is looking to a worrying year ahead. The IMF and the Central Statistical Organization both estimate a slackening of growth to 8.7% for FY07-08 from 9.6% for FY06-07. Furthermore, the inflation rate exceeded the target 4% at the end of January. The UPA coalition led by the Congress will pass what will be its fifth and probably its last budget, with national elections round the corner in 2009. Finance Minister P. Chidambaram’s strategy should be to balance growth and inflation maintaining a guarded treatment of prices, while sustaining GDP growth and meeting deficit targets. The significance of this year’s budget is the probability of a populist motive behind the framework.
Typically, a populist budget is a proponent of large government expenditure with an attempt at increasing growth, redistributing wealth and improving the condition of the ‘impoverished’ masses. Though a success in the short run, an indifference to economic constraints, such as budget deficits generally plunges the economy deep into recession. A budget so appealing to the masses should be considered an effective tool for any adept politician to remain in power. Ironically, a quick analysis into the election history of India reveals quite the opposite. This is a country where anti-incumbency has been the norm for the past 30 years in spite of a populist budget being passed each and every election year. Politicians are obviously not the most rational of our species.
This is a country with strong economic fundamentals, backed by a buoyant corporate sector, and an increase in direct tax revenues (income and corporate tax) by more than 43% over last year. These revenues have, for the first time, exceeded indirect taxes, which include customs, excise duties and service tax. However, the Indian economy is in a consolidation phase at the moment. Control of inflation will be of prime concern to Chidambaram, with price on the rise in the past month. Recent petrol and diesel price hikes should raise this trend in the short term. The Reserve Bank has, for the moment been conservative, and not resorted to any interest rate cuts. The Indian market has had a bumpy start to 2008, similar to its bigger Asian counterparts. With immense fund withdrawals and major companies like Emaar MGF pulling out their IPOs, the Sensex has tumbled some 13-percentage points. But this seems more like a reality check than a market crisis.
Sustainability of GDP growth will be a challenging task involving tax cuts, and increased spending on social sectors like education and health, alongside agriculture and general infrastructure spending. It is important to address the lack of growth in the agricultural sector as more than half of the Indian population still relies on it. Furthermore, infrastructure needs to be revamped just to meet the needs of the exponentially growing urban populations and to encourage more FDI. Education has emerged as the most important factor in sustaining the GDP growth, and with over 63 million children not in school at the moment the Indian government needs to take drastic action to improve conditions.
The Finance Minister is expected to announce a package for farm production addressing the agricultural slowdown. It is probable that substantial funds will be allocated for National Rural Employment Guarantee, rural health sectors and relief measures aimed at farmers, so as to allow them to ‘benefit’ more from the economic success India has seen. He is also likely to introduce various tax reliefs pleasing people across the board and tackling the recent slump in industrial production. All things considered, this seems to be the framework of a somewhat prudent populist budget. And herein lies the irony. With such a budget, the government, though quite unwittingly, will provide India with the ability to continue growth at previous levels and help the economy attain the framework required for long term prosperity.