Plaudits — with a Bengali accent — to our finance minister, who has shown that the UPA government, whatever its failings (and they are many), has a clear and focused approach to financial management. The Budget speech hit all the touch-points - with the exception of FDI in multi-brand retail - and provides a highly credible picture of strong growth ahead
Of course, the devil, as always, is in the details. To contain the deficit at 4.6 per cent, as he plans to do in 2011-12, the finance minister is counting on an increase in tax revenues of nearly 25 per cent. With forecast real growth of 9 per cent and inflation targeted at no more than 6 per cent, this translates to an increase of around 10 per cent in receipts as a result of improved compliance and a widening of the tax net. This does appear a tad optimistic.
However, the economy is certainly on a roll and, assuming the crisis in the West Asia doesn’t roil world markets for too much longer, I would bet that we will end up with better than 9 per cent growth.
Inflation, of course, will remain a major issue probably over the next few years. However, as explained in the Economic Survey, inclusive growth and globalisation — both things we want and need — are inflationary in themselves. As our economy becomes more inclusive — by the end of 2011-12, all the 73,000 habitations will be linked into the banking system — the otherwise static savings of poor people will enter the financial market and acquire greater mobility. This will push up money supply generating more inflation. So, too, as the economy continues to globalise, the price of a basket of tradable goods in India will edge closer to the price in richer countries — while some of this will adjust in the exchange rate, some of it will be forced into domestic prices.
These are realities we can’t hide from. The good news is that rather than going for easy (populist) fixes, such as cutting customs duties on fuel, the FM has instead chosen to keep building a solid structural response to inflation, from investing in rural education and health and agricultural infrastructure to delivering subsidies directly through coupons or cash payouts. The dramatic progress made by the UID project — the FM announced that from 1 October, 2011, there will be 10 lakh Aadhaar numbers released every day — confirms that the government’s commitment to clean up the huge waste (and corruption) in our current subsidy scheme is real and happening.
Again, the much talked-about GST (unified goods and service tax), while still delayed by political wrangling, does appear to be getting close to reality. If, as he expects to, the FM is able to push this through during 2011-12 — he is already talking about the IT infrastructure — it will eliminate any number of inefficiencies in inter-state business and provide, over time, a boost to both growth and inflation control.
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The FM also brought long-dormant financial sector reforms to the forefront. Perhaps most loudly, he announced that RBI would be issuing guidelines for new banking licenses before the end of this financial year. This is a crucial reform since growth is ultimately limited by the amount of investment capital that supports it. Since the government plans to continue to hold a majority stake in the PSU banks, fresh banking capital can only come from new banks.
Another chestnut that has been in the fire for a long time is the setting up the Public Debt Management Agency in the Ministry of Finance; this will free up RBI to focus more singularly on monetary policy, which will definitively improve inflation management, clearly a critical need.
Liberalising FDI policy, increasing substantially the limits for FII investment in infrastructure bonds, and permitting non-residents to invest directly in our domestic equity markets are all important pieces in increasing our degree of openness to capital flows. All of these will certainly impact volatility of both our forex and equity markets, but the good news is that the FM recognises — and acknowledges by these changes — that India is now largely a grown-up economy, with most entities, at this level, well able to take care of themselves.
All in all, an excellent budget.
The only gaps to me were, as I mentioned before, holding off on FDI in multi-brand retail and, more critically, no mention whatsoever of the funding of political parties, which is the root cause of India’s corruption. While the FM did announce the setting up of a group of ministers to “consider measures for tackling corruption”, a much more effective expedient would be to require the accounts of all political parties to be audited by the Comptroller and Auditor General of India.
I guess that may have been too much to ask.