The Union Budget for 2011-12
By Pulapre Balakrishnan
The Economic Survey is the government’s view of economic performance in the year just past. The Budget is the government’s statement of fiscal transactions for the year to come. It is normal that they are linked, the former providing much of the rationale for the latter. In my view this year the link is closer than ever. This provides the economist with a window on the Budget for 2011-12 as the claims made and the allocations proposed by the finance minister in the Budget follow quite closely the understanding contained in the Survey. For this reason I shall devote disproportionate space to the last.
I believe that the Survey uncritically accepts the CSO’s forecast on the agricultural growth for the current financial year. It has been pegged at 5.4 percent, having barely grown in the year 2009-10. My scepticism stems from the fact that the continuing, close to double-digit, food-price inflation suggests that growth in the sector may not have been so high after all. The government at least acknowledges that inflation is a problem. On the external sector, though, it remains far too sanguine. It speaks of the importance of invisibles, implying perhaps the export of software services, in covering for the increased trade deficit. However, the invisible earnings themselves are lower in this fiscal. The reason for this we know of course. It is due to the global slowing. The point is that the current account deficit, for the first half of the current year, has doubled. The Survey does not appear to find this a cause for concern. Finally, the growth of fixed capital formation has yet to reach the level registered before the global crisis. So I believe that the Survey’s prognosis that over the next two decades India will grow faster “than it ever has” is without foundation. Where I do agree with the Survey is with the view expressed that “Agriculture is critical for macroeconomic stability and sustained growth.” But again, its analysis is somewhat weak. It speaks of the relative price rise implied by the current agricultural price inflation as “incentivizing the farmer”. This sounds impressive of course! However, evidence from across the world suggest s that prices may have less of a role to play in driving output increase when compared to irrigation and extension services. These are in very poor shape in India today. The Survey barely refers to these and the Budget does not address them.
I now turn to the Budget for 2011-12. Progressing quite naturally from the conclusions in its Survey, it emphasises agricultural growth and points to inflation as a concern. The control of the latter it appears to have outsourced to Mumbai when it speaks of the RBI’s effective use of monetary policy thus far to curb it. Actually, it is disingenouous in its praise when the Reserve Bank itself has said that it has few instruments at hand to deal with supply-side inflation. While there has been a decline in the inflation rate over the financial year, note that the November figure for the growth of industrial production is lower by a factor of close to 4 in a year-on-year comparison. A decline in growth when inflation is tackled through interest rate increases is too well known to require repetition. There is also a suggestion that the budget’s own contribution to inflation control is via a reduction in the fiscal deficit. But managing inflation via demand-side measures, such a monetary and fiscal tightening, works via reduction of output. This may of course be considered a price worth paying, but then the Finance Minister cannot at the same time assert that the growth rate will rise to 9 percent, from the current 8.5 or so. Finally, agriculture. It has been claimed, and not by the FM alone, that the budget deals substantially with the future of agricultural growth. I find this a tall claim considering that there is no reference to capital formation. Raising the rate of growth of Indian agriculture requires a combination of greater public investment and superior governance. We have little reference to either in the budget. While we cannot expect much on the latter in a budget we would expect greater public investment outlays if we want that sector to grow.
In conclusion, I would state that I don’t think setting targets for loans to the farm sector, or any other sector for that matter, is a good idea. The Finance Minister has taken much credit for this measure, but it creates incentives for inefficient supply of loans. Something of this kind was at play in the US sub-prime crisis. But I do believe that the proposed move to cash transfers to the poor, to be implemented from March 2012, is a good idea. It has been successful in Brazil and should at least be tried here. Despite high growth, the Indian economy is not in great shape. There is deprivation here. To deal with it effectively we need to be innovative.