The Economist : India Budget
Friday, March 4, 2011
PRANAB MUKHERJEE, India’s finance minister, is full of beans. His budget on February 28th drew praise from some observers for not being too lavish despite big state elections due next month. Chuckling over it the next day, he said the economy was in fine shape. Getting 9% growth “plus or minus” in the coming year will be a cinch, at least if the monsoon comes on time. “I require only the blessings of a god and a goddess.” It is tempting to expect the gods to keep smiling. Only China, among big economies, has pipped India’s 8.6% growth in the past year. Mr Mukherjee foresees a rosy period of easing inflation, reviving foreign investment and robust public finances. He may be in for a shock.
Inflation is still a pressing problem. High food prices hurt the urban poor. In December street protests over the price of onions led the government to ban their export. Onion prices have since collapsed, but other causes of inflation remain. Cash is pouring into rural areas through a make-work scheme, named after Gandhi. This will expand as Congress, the party at the head of the government coalition, tries to ease dire poverty in villages, where most voters still live. Benefits will flow faster as cash transfers replace clunky subsidies for fuel and fertiliser. Pilot schemes for this will start early in 2012, and may be speeded as Indians are issued with identity cards, in a separate initiative. Social spending is set to leap by 17% next year, as the government attempts to encourage “inclusive” growth. Congress’s chief, Sonia Gandhi, next wants a law embodying a universal “right” to food. How this might work (if at all) is unclear. Again, technocrats favour transfers of cash or vouchers over dishing out food through a vast and corrupt state bureaucracy. Either way, the subsidies mean demand for food will soar. No matter, says Mr Mukherjee breezily. By spending on agriculture, giving farmers credit, easing transport bottlenecks and getting better cold-storage distribution, supply will rise, too. As for other causes of inflation, seven interest-rate rises by the central bank have removed monetary excess, he says. Little can be done about painful world prices for oil and other commodities, but, barring a big shock, Mr Mukherjee guesses annualised inflation will drift down to about 6% in a year’s time, from nearly 10% today.
If that sounds a stretch, so do claims that investors will crowd back. Foreign direct investment in 2010 fell to $21 billion, from $27 billion in 2009, even as it grew elsewhere in Asia. Overseas portfolio investors who once raved over India’s stockmarket have pulled out $2 billion in the past couple of months, reflecting fears of overheating. Investors, local and foreign, complain that the environment minister has blocked good projects. They grumble that fine talk of opening up retailing and other industries leads to no action. Two decades ago the then-finance minister, Manmohan Singh, began scrapping regulations and unleashing growth. Today, with Mr Singh in his second term as prime minister, the government looks timid. Ministers retort that they continue to liberalise. Promised financial reforms, if passed (earlier efforts lapsed), could eventually let outsiders play a bigger role in insurance and lend more for new infrastructure: $1 trillion is to go on new roads, rail, ports and so on in the next few years, nearly half to be funded privately. This money would go further if land acquisition were less corrupt and chaotic. Delhi’s swanky new airport train, a public-private project, was delayed for months in part by wrangling over land. Mr Mukherjee admits there is a problem, and talks hopefully of the “expeditious” passing of a land-acquisition act. That seems unlikely. Reform may yet roll, in the form of a long-planned general-services tax. From June, 11 states will launch their first attempts. Next year, if the opposition backs it, the whole country will get the tax. That would help to reduce a budget deficit that is now over 5% of GDP. So would getting more people to pay income tax: a raid by gleeful tax inspectors on Bollywood starlets in January attracted lots of attention. But if such efforts are delayed, the government will have to adopt other devices to patch up the public finances. It used billions from a one-off auction of 3G telecom spectrum to plug budget gaps this year. It promises to sell more chunks of state-owned businesses, presumably in order to fill holes in the year to come.
Reference : http://www.economist.com/node/18291557/print