The morning after is bleary eyed. Many might have missed some fine print. Some documents are not available. The server is busy, downloads are all clogged up, and the Finance Ministry has not finished its press briefings. By the next day, the vision is clearer. And most analysts, investors and even economists have had a sound sleep.
So, the response of the financial markets on the second day may be said to be more reliable, and on this the Finance Minister has scored big time. The Sensex has given a twenty one gun salute, and hopefully enough animal spirits have been unleashed to deliver the growth that he hopes for. Or maybe, it is simply the “foreign hand” of the FII’s, who are jubilant about the increased access to India’s bond and stock markets.
As is the case with Union Budgets of recent times, the burden of expectations was rather heavy on the shoulders of the finance minister. Specifically, the Budget 2011-12 was expected to address three issues: (a) to provide a strong anti-inflationary stance; (b) to continue to support growth impulses and (c) to take giant steps towards fiscal consolidation.
The budget managed to deliver on all three accounts to varying degrees. The budget anti-inflationary stance has already been applauded on these pages. The main signal was restricting the growth of the size of the Budget deficit to merely 3.4 per cent when national income itself is likely to go up by 15 per cent rupee terms. Secondly, the cost push inflation of an increase in excise tax was avoided. (The Coal Ministry might have taken cues earlier too. Just before the Budget, Coal India announced massive price hikes that will contribute to cost push.)
This reluctance of the FM to roll back the stimulus and restore excise tax rate to 12 per cent from the current 10 per cent was the most surprising silent part of his speech. It was like the dog of Sherlock Holmes, that did not bark. How was it possible to achieve a fiscal deficit sharply down to 4.6 per cent without resorting to the legitimate rate hike in excise? It turns out that this silent bark contains many heroic assumptions regarding revenue and expenditure growth. For instance, fertiliser and oil subsidies are assumed to grow only modestly and tax revenue are assumed to grow at a healthy rate of 18 per cent.
But this is not the place to quibble about these assumptions. For after all the budget is a place to make ambitious plans and stretch targets.
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While there was a visible attempt at expenditure control, the treatment of food inflation was not satisfactory. The FM too mentioned in his speech that food inflation is being caused by more incomes of poor people. This is a line being oft repeated. President Bush started it. Our Prime Minister too said that food inflation posed a serious threat to India’s growth, and that it was “driven by an increase in the prices of vegetables, fruits, milk, meat, eggs and fish”. He said that rising prices are “partly attributable to rising income levels”.
The changing patterns of consumption are causing the poor to switch from carbohydrates to more vegetables and proteins. The Reserve Bank of India too calls this the “protein problem” of food prices. The FM said that inefficiencies in the food supply chain were causing a wide disparity in prices received by the farmer, and those paid by the urban consumer.
We need a big shift in the way we manage our production, storage, distribution — indeed the entire supply chain. At this stage many TV viewers sat up, and expected the FM to utter the magic words about FDI in retail. Not that FDI is a magic wand. But it would have been a huge paradigmatic shift.
An unleashing of more animal spirits, to tackle the protein, nay food supply chain problem. But there was no announcement of FDI in retail. We need a very strong supply-side strategy to ensure food security and protein sufficiency, for example, India is already the world’s largest milk producer but the yields of our cattle are much lower than of the Dutch. Similarly, while we have remarkable growth in soya production, much of it is going as cattle feed and not into human beings. The same can be said about poultry and egg production. The prospects of overseas corporate farming for pulses, soya and corn need to be fully exploited. India’s large coastline and water bodies are hardly contributing to fish form protein. The stigma of import dependence for food protein needs to be abolished forever. One also has to be careful about such assertions because it puts the burden on the demand side. Even the Club of Rome was wrong in its diagnosis of dire world food shortages. In fact, in the early 1970s not only did world food production go up significantly, but food prices were also low and remained stable well upto 2000.
The FM, however, announced Rs 1,500 crore worth of programmes under the national protein supplement mission.To increase milk output, an “Accelerated Fodder Development Programme” aims to improve cattle nutrition. The Budget also has a palm-oil scheme for 60,000 hectares and a plan to build vegetable clusters around major cities. A fifth scheme, continuing from last year, aims at boosting pulses output.
The problem of food inflation, therefore, is not a small, temporary one, but born of a structural shift. It needs an equally large restructuring in response.
Look at onions to understand the challenge. Over the past decade, India has grown three times as many onions, from under five million tonnes to nearing 14 million. Productivity has gone up by almost 60 per cent. But prices, in the same decade, have gone up fivefold, on the back of rampaging demand.
Vibrant growth is essential to make a lasting dent on the problem of inflation. This growth can come only by unleashing animal spirits.