Indian Economy growth rate has decelerated to 5 per cent, the
lowest in the decade.
The retail consumer prices have risen by more than 10 per cent.
When economy stagnates prices should have fallen. Here we have a classic case
of stagflation.
This situation makes it terribly difficult for the Finance
Minister to manoeuvre: to keep the inflation in check he has to curtail
government expenditure; to stimulate the economy he has to increase the
expenditure. What is Chidambaram going to do?
The current account deficit is at its historic high, 5.4 percent
of GDP. Reserve Bank considers 2.5 as the prudent norm. In the short run there
is no solution other than to ensure net foreign investment inflow equivalent to
the external gap. But there is nothing more abhorring to finance capital than
high fiscal deficit. It is the mother of all financial troubles.
The finance capital has successfully imposed austerity in the deviant European
countries. They expect India also to follow the same route. The rating agencies
are demanding an reduction in the fiscal deficit to minimum 4.8 per cent from
the expected 5.3 per cent for 2012-13. But the Indian electorate demand
ameliorative measures for the miseries.
To whom is Chidambaram going to lend his ear?
It is elementary macro economics that current account deficit is
equivalent to the difference between domestic saving and investment. The
deceleration in investment has been as important a factor as depressed consumer
demand for the present economic downturn. The animal spirits of the investors
have taken a beating.
The CII’s survey has shown that majority of investors do not
foresee any major improvement either global or domestic in the investment
climate in the immediate future. This atmosphere has to be changed and
investment buoyed up. But will it not lead to widening of the current account
deficit and increase the risk of a foreign exchange crisis and run on the
rupee?
What will Chidambaram choose between domestic growth and
external stability? The Finance Minister is in an unenviable situation -
between the devil and the deep sea as they say. My expectations regarding the
response of the Finance Minister in his budget tomorrow are the following:
One, the fiscal deficit will be reduced to 4.8 per cent. His
focus will be on the expenditure side rather than the revenue side. Though
there are talks about super rich tax, dividend tax and so on, they can be only
tokenism, lest the Finance Minister offend the investors. But for certain
tinkering with income tax and possible sops to investors in SEZs, there will
not be many concessions. It may be remembered that the direct tax concessions
of the UPA period total over Rs 5 lakh crore. Be sure that there will be no
roll back.
Two, Food Security Program with an additional expenditure of
rupees 50 to 60 thousand crores will be budgeted. This is the concession
that the Finance Minister is going to make to the forthcoming election. Other
sops such as expansion of direct cash transfer will not involve any additional
expenditure. How will he reconcile the food security expenditure with the goal
of reduction in fiscal deficit? The only choice for him is drastically squeeze
the expenditure on other items. Stage has been set for reduction in subsidies
for petroleum products through de-control and fertilizer etc through direct
transfer system. The overall expenditure will be more or less pegged at the
same level as at the budget estimate of 2012-13. In real terms there will
be reduction in overall expenditure.
Three, there will be additional incentives for exports, may be
an additional tax on import of gold. But there is little chance that there
would be any significant reduction in external current account deficit. Though
fears of yet another collapse in the West have receded, the growth scenario is
not very encouraging. The global growth may increase from less than 3 per cent
to 3.5 per cent. It may be remembered there was absolute reduction in exports
from India despite near 20 per cent depreciation of Indian Rupee in 2012-13. We
cannot expect any dramatic upturn in exports. On the other hand, it may be
noted that despite the stagnation, the imports continued to increase or its
reduction was so marginal that the current account deficit widened. In
this situation the Finance Minister will have to put up a brave face, announce
additional incentives for exports and hope for the best.
Four, the domestic investment decline has been accompanied by an
even more drastic decline in domestic saving. The domestic savings have shrunk
from 36.8 per cent in 2007-08 to 30.8 per cent in 2011-12. There has been
reduction in house hold savings. People seem to prefer to save in gold rather
than in financial instruments. These trends have to be reversed. There have
been suggestions for concessions to interest income, reduction in the lock in
period for bank deposits eligible for tax rebate, broadening Rajeev Gandhi
Equity Savings Scheme etc. Some of them will necessarily have to be taken up.
Five, having burnt the other bridges, only solution for the
finance minister to kickstart the economy is to arouse the animal spirits of
the investors. Getting more and more embroiled in one scam after another, the
strategy of encouraging primitive accumulation by permitting the plunder of
common natural resources cannot be pursued as enthusiastically in the past. Be
sure, more public sector will be put up for fire sale. The budget platform will
be used to proclaim to the investors, both domestic and foreign, that India
will pursue the liberalisation policies resolutely. The ascension of
Chidambaram to the chair of Finance Minister has been accompanied by a sleuth
of structural reforms in financial and retail sectors. The budget will give
strong message that despite the elections the unpalatable reforms will
continue. Land Acquisition Bill, Mines and Minerals Bill, Pension Bill, Goods
and Service Tax and Direct Tax Code are pending. A time bound road map for
their implementation can be expected. Chidambaram is laying most of his budget
eggs to hatch in the expected confidence that the budget would arouse in the
investors particularly the foreign ones. This is not a good election strategy.
But he is riding the tiger and has little choice. Compare the predictions of
his forth coming budget with the dream budget of the past and we will
understand why this situation is largely his own making.
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