Just days before Pranab Mukherjee presented his first full Budget under the United Progressive Alliance (UPA) government in July 2009, there were reports of a meeting between Congress President Sonia Gandhi and the finance minister. For Mukherjee, it was a significant Budget. His previous Budget, under the Indira Gandhi government, was framed 25 years before in a different era. Yet, the message he was reported to have got from Sonia Gandhi in 2009 was no different: make sure that the common man is not hurt by anything in the Budget.
Three years later, there are no reports yet of any meeting between Sonia Gandhi and Mukherjee. Instead, there is a statement from the Congress president that has posed a new policy challenge to Mukherjee and his team in the finance ministry. In that statement, Sonia Gandhi held inflation as one of the factors responsible for her party’s debacle in the recently-held Assembly elections. It is unlikely that Mukherjee will be able to ignore that message, even though his dilemma over policy options will get more acute as a consequence.
Lucky is the finance minister who can achieve high growth with a modest inflation rate. Mukherjee’s immediate predecessor, Palaniappan Chidambaram, enjoyed that fortune. Economic growth of around eight per cent, aided by a benign rate of inflation of five to six per cent, helped Chidambaram mobilise more revenue that he, then, squandered on various leaky poverty alleviation and entitlement schemes to keep the Congress president happy.
Mukherjee’s options are limited. His Budget team, therefore, has an unenviable task. Ideally, he should have been able to roll back part of the stimulus measures announced in the wake of the global financial crisis in 2008, by raising the excise duty rate by at least two percentage points. Industry would have grumbled, but it was already prepared to accept such an increase without much noise. What has now made Mukherjee and his Budget team rethink that option is whether an excise duty increase will push up the inflation rate. Excise rate increases are notorious for their ability to fuel inflation since manufacturers can easily pass on the impact of the higher tax burden to consumers in the form of higher prices. So, how will Mukherjee address Sonia Gandhi’s concern over inflation?
On the other hand, if taxation rates are not raised along with perhaps a widening of the tax net, the government’s fiscal deficit cannot be contained to a prudent level. The slippage in the government’s fiscal deficit target for the current year has been estimated to be substantial — almost a percentage point over the Budget target of 4.6 per cent of gross domestic product (GDP). Thus, even to keep the deficit at the same level that Mukherjee had promised in February 2011, he would have to raise more revenue in his Budget for the next year. If he fails to prepare a blueprint for that, a higher fiscal deficit itself could stoke inflation with the government continuing to borrow more from the market and further raising the cost of money for industry. The additional downside in such a scenario would be that even growth could become a casualty.
So, expect Mukherjee to make noises about how the government plans to rein in prices. Even if he raises the excise duty, as he had planned earlier before the election results came in, his Budget speech is likely to contain dire warnings to those industries who taking advantage of the excise duty changes might indulge in profiteering by raising prices excessively. Remember the Budgets of the 1980s when finance ministers would promise on the floor of Parliament how the government would set up committees or mechanisms to closely monitor price changes after the Budget? Similar announcements are not ruled out this time.
There is another way this Friday’s Budget could become similar to the pre-reform Budgets. The focus on agriculture should come back, though with a difference. With agriculture growth slowing this year, the finance minister’s plan may well be to kick-start this sector so that its contribution to GDP rises substantially. If agriculture growth could be raised to four per cent, up from less than three per cent in the current year, aiming for a seven per cent-plus growth rate next year will appear less daunting.
What can Mukherjee do to agriculture? One option, under examination, is to unveil new schemes on the lines of a public-private partnership (PPP) in the farm sector. Several years ago, the government had launched the idea of agri-business consortiums in which business ideas promoted by the private sector and based on agricultural produce were given financial and technical support by a government agency. The finance ministry’s view is that such PPP projects in agriculture should now get some more policy support. If necessary, even fiscal incentives could also be considered. And why not? After all, this will help both farmers and the common man.
In short, this Friday, Mukherjee’s fourth Budget under the UPA will highlight the strains of an economy and a polity that have been weighed down by economic and political setbacks. And the solutions the government is exploring are not new. They may remind you of the forgotten era of the 1980s.
