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Management is the keyword

If I were Pranab Mukherjee I would wish I had a time machine — to go back to 2004 when the UPA began its first innings and finding money for a new scheme was the last of the worries its finance minister had, writes Rajesh Mahapatra.

india Updated: Jul 02, 2009 23:53 IST
Rajesh Mahapatra

If I were Pranab Mukherjee I would wish I had a time machine — to go back to 2004 when the UPA began its first innings and finding money for a new scheme was the last of the worries its finance minister had.

The India story was just about peaking then, with investors from across the world flocking to its shores as the economy grew at a record 9 per cent clip. An attendant surge in incomes of companies and a booming middle-class helped swell the tax kitty, helping the government keep its budget deficit under check with generous allocations for programmes intended for the aam admi — from guaranteeing 100 days of rural employment to waiving farm loans.

Cut to 2009, growth has slipped below 7 per cent, tax revenues have turned sluggish and the fiscal deficit — the gap between what the government earns and what it spends — has ballooned to an alarming 6.1 per cent of the country’s gross domestic product. But expectations from the new government are high and the clamour among businesses for fiscal aid is getting louder by the day.

So, what should Mukherjee do?

The truth is that he can’t do much by way of allocating more funds or offering new concessions on taxes. But he can do a lot to get more out of the money that’s already being spent.
Even though there is a political consensus to go easy on setting limits to fiscal deficit, the finance minister would do well to stay within the target set out in the interim budget — that is to keep the fiscal deficit this year under 5.5 per cent of GDP. A higher deficit — and, therefore, increased government borrowing — could not only keep interest rates from easing further, but also prompt agencies like Standard & Poor’s to cut India’s sovereign rating. At a time when foreign investors are looking to return, after a lull of more than a year marred by the global economic downturn, a rating downgrade is the last thing India can risk.

The Economic Survey underscored similar concerns and stressed the need to reduce the fiscal deficit to ‘3 per cent of GDP at the earliest’. It suggested that auction of 3G spectrum and divestment in public sector companies can generate funds that will help keep the fiscal deficit under check.

3G spectrum can be tapped in the near term, but money from divestment would take much longer than expected. Instead, the finance minister could consider reversing some of the excise duty reductions the government had announced last year to stimulate demand. It is evident now that most manufacturers used those reductions to shore up their profits and didn’t pass it through to the consumer although that was the objective behind the duty cuts. Moreover, the government plans to enforce a nationwide uniform good and services tax (GST) by the end of the next fiscal year and it would be a good idea to start in this budget aligning excise duty rates with the GST rate which is likely to range between 12 to 14 per cent.

That said, Mukherjee also faces several inescapable compulsions, which stem as much from the imperative to put the economy back on a fast track as from promises his party made ahead of the elections.

For instance, there would be measures to boost infrastructure spending and some tax giveaways for sectors such as realty, textiles and exports, which employ more people than any other industry and have been hit hard by the downturn. There is also the talk of adding up to Rs 50,000 crore to allocations already made in the interim budget for education, health, roads and a couple of other sectors. The extra money is meant for new universities, expansion of the healthcare network and expediting construction of new roads — all of which, it is argued, are crucial to sustaining high growth in the longer term and making it inclusive.

Then there is National Rural Employment Guarantee Act (NREGA) and the promise of bringing a legislation that will make it mandatory for the government to provide cheaper food grain to all families below the poverty line. The latter would take time to be in place and may not have a fiscal impact this year. As for the National Rural Employment Guarantee Scheme, it all depends on the monsoon.

If the rains are good, allocations already made in the interim budget might hold good. Otherwise, this scheme, which is driven by demand from people looking for work, could undo any consolidation on the fiscal front.