The two major pieces of economic news on Thursday have just made Finance Minister Pranab Mukherjee’s job today harder. Neither the government’s pre-Budget Economic Survey nor the mid-quarter monetary policy review from the Reserve Bank of India (RBI) has actually aided the Budget exercise. The Survey, for one, has produced optimistic numbers for what gross domestic product (GDP) growth will be in 2012-13. There will be questions on whether, indeed, the “weakness in economic activity has bottomed out and a gradual upswing is imminent”. The GDP growth projection of 7.6 per cent for 2012-13, though not completely out of sync with other estimates, may raise some eyebrows — especially given the failure of last year’s forecast. The revenue projections in the 2011-12 Budget echoed the optimism of the growth forecast made in last year’s Survey. India missed those targets — not narrowly, but by a mile. This year’s Budget cannot rely on such unrealistic projections. If it does, UPA-II’s lack of credibility will turn into a full-blown crisis. India cannot afford an economic policy establishment seen as detached from the reality of slowing growth.
Fiscal consolidation must be at the top of the finance minister’s agenda. That will require realistic assumptions, not pie-in-the-sky numbers. It will also require firm steps on subsidies. Here, at least, the Economic Survey has sensible points to make. Two years ago, the Survey called for a drastic overhaul of the subsidy regime and a move to a transparent transfer mechanism. This year the Survey reiterates that call, and the need has now become pressing. The finance minister will have to present a credible time frame for such reform in the Budget. A “large adjustment” to diesel prices, such as is recommended in the Survey, is the least Mr Mukherjee can do.
The Survey also points to tight monetary policy as a crucial cause of the growth slowdown. Yet the RBI, apparently, continues to shy away from easing the policy rates and stewarding India’s growth. In its mid-quarter review, it has again punted the ball to Mr Mukherjee, insisting that “credible fiscal consolidation will be an important factor in shaping the inflation outlook”. However, that very review points out that inflation is being driven by rupee depreciation and high global fuel prices. Mint Road shifted outlook towards looser monetary policy three months ago. Since then, inflation has moderated, but growth has slowed further. The RBI seems to have ignored the fact that its actions work with a lag, something it recognised quite well when raising rates 13 times. True, the government bears responsibility for scheduling the Budget after the mid-quarter review. However, India’s citizens and investors expect both the monetary and fiscal authorities to step up and do their job. If nothing else, it is incumbent on the RBI governor to abandon his schedule and, if the Budget meets with his approval, cut the repo rate immediately.