Budget 2014: Before the achhe din, here comes the big squeeze
Finance minister Arun Jaitley’s first budget will hold out cues on how the govt plans to deliver on some of its poll promises. It can well kick off the economy’s great come-from-behind feat.columns Updated: Jun 30, 2014 14:54 IST
There is more to the summer rains than the romance of pitter-patter. Who would know this more than India’s new finance minister, Arun Jaitley!
As he prepares to present the Narendra Modi-led National Democratic Alliance’s first budget, he would probably be remembering one widely used concept in economic theory: constrained optimisation.
It represents arriving at a set of best solutions to an array of problems. In a real economy, however, the most favourable way out for one set of problems could harm prospects somewhere else. For instance, if prices are rising steeply, slashing high interest rates may sometimes end up only fanning inflation. Striking a balance may involve a painfully long process of slow, gingerly taken steps.
With the rains playing truant, Jaitley is sweating it out, literally, closeted with officials, knee-deep in files, scouring for that extra rupee to be wrung out of the coffers. Or, figuring out how to get some of the country’s mount of rotting grain into stomachs that need them.
Read: A look at how the budget machine works
The government needs to spin jobs for tens of millions of restive hopefuls — to fulfil its poll pledge of ‘Achhe din aane wale hain’ (Good days are ahead) — while the elbow room in the treasury remains extraordinarily tight.
That brings me to the larger question of inflation. Time was when price rise was about food staples like onions. This season, the causes of the tears also lie elsewhere.
Food inflation, a proxy for how costly the platter has become over a year, is galloping towards the worrisome 10% mark. It was 9.50% in May. It could get worse if India receives deficient monsoon rains because of a possible El Nino effect — a weather glitch in the Pacific Ocean that causes droughts in the sub-continent.
It is not just about food prices. Payments for utilities such as telephone services and electricity have surged and a visit to a beauty parlour or a salon is more expensive now than, say, a year ago. Pumping iron at the gym, or a weekly visit to the movies at a multiplex also costs more.
A weak rupee, higher service taxes, rising borrowing costs, rentals and utility bills have collectively prompted restaurants to raise meal rates and gyms to hike fees.
Besides, yesterday’s luxuries have become today’s norm. As millions of people shift to higher standards of living, the focus is changing from basic needs of nutrition to more aspirational products and services that will soon become a part of daily life.
Let us call it lifestyle inflation, shall we?
Read: Railway fare hike could be the first of many bitter pills
The Reserve Bank of India’s continuous monetary tightening — raising interest rates to squeeze demand, and thus, prices — has failed to tame the inflation monster.
In the past three years, home loan EMIs have gone up. Since these cannot be compromised, the household budget is squeezed by reducing expenses such as clothing and eating out.
Households putting off spending are signs an economy-wide squeeze (the nearest evidence is found the neighbourhood mall), especially at a time when thousands of firms have given meagre salary hikes and hiring fewer people.
Little wonder, then, Prime Minister Narendra Modi has warned of “tough decisions” over the next couple of years to nurse India’s economy back to good health. Jaitley’s first budget will hold out cues on how the government plans to deliver on some of its poll promises and breathe life into the waning economy.
The government’s financial plans, pretty much like households, are primarily about prioritising spending. The budget for 2014-15 will be a tough balancing act, with the government required to keep public spending under check, without falling into a debt trap.
I can recall many families that are battling multiple EMIs funding day-to-day spending as well as juggling around funds from one loan account to another. Jaitley faces a somewhat similar predicament.
Slashing customs and excise duties can help temper shop-end prices, but will erode revenues, upsetting plans to contain the fiscal deficit — shorthand for the amount of money the government borrows to fund its expenses.
Both the prime minister and the finance minister’s candidness in admitting the constraints are commendable, especially for a new government when populism, rather than policy prudence, can become the catchphrase. So far, the government has demonstrated its willingness to walk the talk on both price control and fiscal discipline. The order to crack down on hoarders and break the cabal of middlemen, and the hike in railway fares are fine examples.
In 1992, frail economic conditions had prompted Bill Clinton’s campaign strategist James Carville to pen the now-famous phrase “it’s the economy, stupid” underlining the need for hard decisions. The phrase rapidly evolved into the de facto slogan for Clinton’s US presidential poll campaign.
Nearly a quarter of a century later, India finds itself in a similar state. It may be just the time to go the extra mile. Jaitley’s first budget can well kick off the economy’s great come-from-behind feat.
Full coverage: Countdown to Union Budget