In 1991, when Manmohan Singh rose to present his first Budget as the country's new finance minister, India was reeling under an imminent foreign exchange crisis - which could have led to defaults. We did not have enough money to pay for even two months of imports. The choices staring Singh were stark; either continue with the disastrous economic policies and see India reduced to an economic basket case or seize the moment to usher in far-reaching reforms. He chose the latter option and the rest is history. It was the time for making bold decisions.
Today - for many different reasons - Finance Minister Pranab Mukherjee is at faced with a new set of challenges. Thankfully, the situation is not as desperate as in 1991. Then it was a crisis of survival - now it is a crisis of growth - especially double-digit growth. India's true potential is not in 10+% GDP growth - but a set of recent events have made this seems difficult to achieve. The threat to this aspirational goal of double-digit growth for the next 10 years could be the opportunity for making some bold decisions.
This current threat to the India story is a result of many external as well as internal factors.
The government seems to be caught between a rock and hard place when it comes to the fiscal consolidation. The FM will find it politically impossible to curtail subsidies and funding for schemes like the National Rural Employment Guarantee Scheme (NREGS). Many of these programmes are worthwhile and necessary for inclusive growth, but the key challenge now is get more of limited resources for this as the government's ability to increase outlays will be curtailed in this Budget.
Options to raise additional revenues like using 3G spectrum auction proceeds to bridge the fiscal deficit are no longer available at the same level. Disinvestment is likely to rope in 40,000 crore. So, taxes will have to provide a boost - though the tax revenues are healthy; it is unlikely that in view of rising inflation, individual tax rates will be raised. So, the only option will be to raise some more from corporate and indirect taxes.
Tax revenues for the next year could also be under pressure if the GDP growth rate buckles under the pressure of political pressures and inflationary factors.
The case of inflation control is the biggest issue in front of the FM - it is also probably the most politically sensitive. The classical response till now has been to raise interest rates, which the RBI has already done seven times during the year.
But this has failed to rein in a price rise which is caused by supply-side bottlenecks and inadequate investments in infrastructure. Also inflationary expectations are on the rise, which is dangerous. The FM has to supplement the RBI's actions with tighter fiscal policy measures - to control inflation, for sure; but, more importantly, to rein in inflationary expectations. This is easier said than done as the fallout of this could be GDP growth slowing down.
ET
Today - for many different reasons - Finance Minister Pranab Mukherjee is at faced with a new set of challenges. Thankfully, the situation is not as desperate as in 1991. Then it was a crisis of survival - now it is a crisis of growth - especially double-digit growth. India's true potential is not in 10+% GDP growth - but a set of recent events have made this seems difficult to achieve. The threat to this aspirational goal of double-digit growth for the next 10 years could be the opportunity for making some bold decisions.
This current threat to the India story is a result of many external as well as internal factors.
The government seems to be caught between a rock and hard place when it comes to the fiscal consolidation. The FM will find it politically impossible to curtail subsidies and funding for schemes like the National Rural Employment Guarantee Scheme (NREGS). Many of these programmes are worthwhile and necessary for inclusive growth, but the key challenge now is get more of limited resources for this as the government's ability to increase outlays will be curtailed in this Budget.
Options to raise additional revenues like using 3G spectrum auction proceeds to bridge the fiscal deficit are no longer available at the same level. Disinvestment is likely to rope in 40,000 crore. So, taxes will have to provide a boost - though the tax revenues are healthy; it is unlikely that in view of rising inflation, individual tax rates will be raised. So, the only option will be to raise some more from corporate and indirect taxes.
Tax revenues for the next year could also be under pressure if the GDP growth rate buckles under the pressure of political pressures and inflationary factors.
The case of inflation control is the biggest issue in front of the FM - it is also probably the most politically sensitive. The classical response till now has been to raise interest rates, which the RBI has already done seven times during the year.
But this has failed to rein in a price rise which is caused by supply-side bottlenecks and inadequate investments in infrastructure. Also inflationary expectations are on the rise, which is dangerous. The FM has to supplement the RBI's actions with tighter fiscal policy measures - to control inflation, for sure; but, more importantly, to rein in inflationary expectations. This is easier said than done as the fallout of this could be GDP growth slowing down.
ET
No comments:
Post a Comment