The Union Budget 2011-12 attempts to ride on India’s rapid recent economic growth while controlling the inflation that has flared up in the past few months. The Budget assumes a high GDP growth of nine per cent and attempts to better last year’s fiscal targets.
Both are optimistic. We expect growth to moderate to 8.3 per cent in the coming financial year on the back of rising interest rates. Slowing growth and the absence of one-off gains make the fiscal deficit target of 4.6 per cent of GDP a challenging one. We expect the fiscal deficit to settle at five per cent of GDP in 2011-12, which is somewhat higher than the targeted 4.6 per cent.
The recent spike in inflation was triggered by food items. Initiating agricultural reforms is critical to addressing this problem, by stepping up the supply of agricultural products. The Budget does take some small steps in this direction. Additional market reforms (including the opening up of retail to foreign direct investment), and steps towards productivity-enhancing measures, would have gone a long way towards controlling food prices that threaten to remain elevated over the medium term.
Raising the limits on foreign participation in infrastructure companies’ long-term bonds by $20 billion is a positive move. Encouraging these investments will improve the composition of foreign inflows (from volatile short-term to more stable long-term) while attracting the much-needed money into the infrastructure sector.
On the financial inclusion front, the Budget extended the flagship NREGA programme and introduced the Food Security Bill. Steps towards improved monitoring of outcomes and dovetailing this initiative with activities that create durable infrastructure in agriculture would have multiplied the programme’s impact. On the whole, the Budget has something for everyone, but the dominant focus is rural.
Roopa Kudva
Managing Director & CEO, Crisil
