If the union Budget were a human being it would score high on body language. It does not say anything that will cause a ripple. Neither does it make hard promises, which may not be possible to deliver. It avers, through nod and wink, what it wants to say and this greatly enhances the comfort level all round.
Take the case of the fiscal deficit. The attempt to tame it has received invaluable help from the auctioning of spectrum for 3G services. No doubt, the return of high growth and advent of inflation (it enhances the denominator in the ratio) have helped. Without the 3G boost — a one-time event — the revenue upswing will be very difficult to repeat. But this has not prevented the finance minister from projecting not just a repeat of this year’s sharp decline in the fiscal deficit but also a very conservative government borrowing requirement.
The circle has been squared by making an unrealistic projection of a very modest rise in expenditure. The effort to keep expenditure under control will be attacked from two directions. One will be the immediate fallout of the sharp rise in global oil prices. Neither the turmoil in West Asia, nor the excess liquidity created by the developed economies to revive growth, will be gone soon and either a rise in domestic fuel prices (it will negate inflation control) or the energy subsidy bill appears round the corner.
The other attack will be the pressure on expenditure from the inclusive agenda visualised for various social sectors. The fertiliser subsidy bill will go up before direct cash transfers will be able to bring it down. A vastly enhanced food subsidy bill will be a certainty once food security comes into play, in no matter how staggered a pace.
Despite the inherently unrealistic low borrowing requirement projected, the markets have acted on cue, gone through the roof. It is unlikely that anyone will want to or be able to take Mr Pranab Mukherjee to task next year for painting a misleading picture of the fiscal deficit. In a similar vein, the Budget makes the right noises on inflation, governance deficit, on both of which no promises are made.
Like any accomplished communications exercise, which a good Budget speech is, the present one knows where to promise, where to appear to promise and where to completely sidestep the issue. In the last category is the issue of current account deficit. Related to it is the issues of dwindling foreign direct investment, a dangerous reliance on portfolio investment and a resultant volatility in the stock markets, which bounce up and down on overseas cues.
A Budget worth its salt would have made some significant announcement to promote FDI (opening the gates for investment in retail was widely anticipated) and simultaneously put up road blocks in the way of portfolio investment. Instead, a measure is announced allowing mutual funds to accept investment directly from foreign investor instead of them having to come via foreign institutions. This may not create much additionality but the directional signal is clear.
And to top it up the ceiling on FIIs investment in corporate bonds is hiked substantially by introducing a large sub-section for investment in bonds issued by infrastructure firms. These bonds can even be issued by unlisted firms and an exit route is created for individual investors despite a three-year lock-in period so long as another similar investor picks up the paper being unloaded. But the prospects of continuing strain on the current account front do not appear to have upset either the markets or analysts.
In fact, the economy remains particularly vulnerable to the threat of inflation as much after the Budget as before when if there was any one point agenda that could have driven the exercise then it was inflation control. The primary inflationary push has come from high food prices and it is unlikely that the plethora of measures trotted out in the Budget will have any impact on them. Salvation on the food front can come only in two ways. One is to sharply raise food output this year itself. This can be done if a major programme is chalked out with the states to raise productivity in the rainfed areas, first by better water management (rejuvenating tanks, check dams and building new ones) and second by offering the carrot of a major procurement drive in coarse grains. The second is to reduce the price manipulation that takes place in the trade in agricultural commodities. On this the Budget is at its classical best in making the right noise, urging the states to get rid of or reform the agricultural produce marking committees, which are both anti-farmer and anti-consumer.
The second inflationary push has come from the imported commodities front over which the government has no control. Oil prices may go down in the medium term but a steady inflationary pressure from them in the foreseeable future should be taken as given.
On this the government can say that there is little that it can do. So it does what it can, adopts the right body language by aligning fiscal policy with monetary policy to promote fiscal consolidation. (Body language because in reality expenditure control and fiscal consolidation are unlikely to take place.) Through this it gains the approval of the vast majority of global commentators on economic policy and lives to fight another day — come up with the next Budget.
