Assessments of the economy by the government and the central bank hinge on a single statistic that will be announced by finance minister Pranab Mukherjee on Friday when he presents the Union Budget for 2012-13: the size of the fiscal deficit. A day before the budget is to be presented the finance ministry’s Economic Survey concedes that the slippage in 2011-12 has been abnormally large. Tax revenues have taken a beating from a sharp industrial slowdown while government expenditure on subsidies have gone haywire because international oil prices did not heed the heroic assumptions made in Mr Mukherjee’s previous budget. The Economic Survey goes to considerable lengths to explain 2011-12 as an exceptional year when fiscal slippage was likely after years of considerable correction and draws some comfort from the fact that states were not as profligate as the Centre.
The Reserve Bank of India’s (RBI) view is not as charitable. In its review of credit policy on Thursday, the RBI stated: “The Centre’s fiscal conditions deteriorated during 2011-12 (April-January) with key deficit indicators already crossing the budget estimates for the full year… the slippage in the fiscal deficit has been adding to inflationary pressures. Credible fiscal consolidation, therefore, will be an important factor in shaping the inflation outlook.’’ The central bank refrained from cutting policy rates to revive industrial demand citing inflation, which has broadly evolved along foreseeable lines during the interest rate tightening cycle. But the RBI is concerned that inflation could still raise its ugly head over a surge in crude oil prices, a lopsided fisc and a rupee headed downhill. The single message emanating from Mint Road is that prices are the central bank’s single-point agenda, the government must turn its energies to stoking the growth engine.
However he looks at it, Mr Mukherjee has his job cut out. His budget today has to revive the economy while keeping inflation within the policymaker’s comfort band. When he announces how much of his countrymen’s savings he intends to borrow, the rest of the economy will know what it will have to make do with. And if inflation pressures are to be kept at bay, the finance minister cannot ignore the variety suppressed by administered prices, principally those of energy. The evolving political environment does not inspire confidence of economic reforms that can reduce inflationary expectations, but by limiting government spending alone Mr Mukherjee will prove his mettle as a politician and an economist. The last time the economy had slowed to a growth rate of under 7% two years ago, the fiscal headroom was much wider. A revival this time calls for greater ingenuity and discipline. This could very well be the last opportunity for the UPA to return the economy to a prudent fiscal path. The challenges can only mount as the 2014 election approaches. There is a lot riding on Mr Mukherjee’s appetite for debt.