In the next Budget Finance Minister Pranab Mukherjee will have to strive hard to reduce fiscal deficit because a big fiscal deficit gives wrong signals to investors. The current year's Central and state combined fiscal deficit stands at 8.5 per cent. If it is not shrunk it will ring alarm bells because several European Union (EU) members have witnessed a serious economic setback arising from big government debts last year. A wide fiscal deficit indicates unsustainable borrowing by the government, and because of the heavy interest payments involved on public debt, important items on the agenda for development get postponed.
In any case, the background for the Budget is good - India is likely to keep growing between 8 and 9 per cent according to experts, but inflation will remain a worry. For inflation control, the RBI has acted again (for the seventh time since March 2010) but mildly. The short-term lending and borrowing rates or the repo rates have been hiked by 0.25 per cent (repo rate is the rate at which the RBI lends short-term money to banks and reverse repo is the rate at which banks park their short-term excess liquidity with the RBI). The repo rate changes would affect the banks' interest rates and a small hike is better than a large hike as it would adversely impact the decisions of industry to invest and expand.
Already industrial growth slowed down to 2.3 per cent in November 2010 (compared to 12.3 per cent a year ago) which is alarming. The RBI has also predicted that there could be a slowdown in GDP growth, taking into account a slower growth in agriculture. Clearly, food inflation, which was 15.5 per cent on January 8, is not likely to come down much because of the RBI's move. It will come down only with a better supply of food items.
General inflation is also up at 8.4 per cent and this is due to a rise in the prices of manufactured goods. Indian industry is facing a severe problem of a rise in all input prices which has led to price hikes for almost all products this year. Higher petrol prices would add to manufacturing costs and lead to higher fuel bills. As oil prices have gone up to $100 a barrel, there may be another petrol and cooking gas price hike in the near future.
But the RBI has rightly emphasised that it is the quality of government expenditure and fiscal consolidation that will matter. For reducing expenditure, the first target may be the huge subsidy bill. The oil and food subsidies as a percentage of the total revenue expenditure take up 11.8 per cent. But these being politically sensitive, the government may tread cautiously - specially in dealing with subsidised food for the poor.
Where the government can save money is in dismantling redundant schemes. The Budget will also have to create a better environment for job seekers by giving technical and vocational training to youth through better implementation of Central schemes like the Swarna Jayanti Shahari Rozgar Yojana and the Swarnajayanti Gram Swarozgar Yojana. MNREGA will be continued because it gave employment to 4.32 crore households in village India last year. Some of the many training schemes that are hardly used can be scrapped to save public money.
There are many Central schemes for women and child development that are not functioning well. Many studies and news reports have revealed that there are big gaps in the women and child welfare schemes at the state level, and the urban poor are not benefiting from them. These have to be refurbished. It is shocking to hear that 56,000 children have died of malnutrition in urban Maharashtra in a year. Undernourished, anaemic women give birth to underweight children in slums who fall sick easily and die. The urban poor do not have easy access to clinics and are not able to give their children proper diet. Public health facilities should be enhanced and made accessible to the urban poor. Consolidating health programmes and getting them properly monitored and implemented would be important in the Budget.
To combat food inflation, more public spending is required in agriculture. Agricultural growth has not reached its full potential in terms of productivity. Around 58 per cent of the labour force is engaged in agriculture and yet its contribution to the GDP is around 12.3 per cent. Small farmers need access to finance and extension work to be able to survive through droughts. Crop failures and poor prospects of being able to repay the moneylenders are leading to suicides, with 17,368 farmers losing their lives in 2009 alone. The development of tribal areas would be important because only with paid jobs and prospects of a better life can insurgencies be reduced. Small and micro-level units also need continued support and access to loans on easier terms. In the unorganised manufacturing sector, investment declined by 42 per cent in 2008-09 due to the lack of access to credit because of tight market conditions.
Certain reforms are expected, especially in the opening of the multi-product retail sector. This being a delicate subject, as it involves the livelihood of millions of people in petty and small trading, will probably not be touched in the Budget, much to the disappointment of those who regard opening up the retail sector as important for attracting foreign investment.
More than before, this year the Budget should also focus on clean and green economy. Environmentally friendly technology will have to be encouraged in order to reduce India's carbon footprint. Alternate sources of energy will have to be funded further as India is likely to be most affected in the future due to climate change. Recycling of solid waste in construction and manufacturing industries will need encouragement. Eco-friendly technologies and procedures ought to be given incentives. In 2009-10, the government expenditure on adaptation to climate variability was around 2.6 per cent of the GDP. Keeping in mind the growing importance of the subject, more has to be spent.
India needs a colossal amount of investment in infrastructure, specially in increasing the connectivity between remote villages and towns. Various incentives have to be given to engage the private sector in highway development. More expenditure will also be needed to bridge the gap between the electricity demand and its generation, estimated at 12 per cent.
No doubt, the 3G spectrum has yielded a revenue bonanza but even so, the government will need more money for financing the much-needed development programmes. It is, however, important not to go in for populist measures that are mere vote catchers and provide opportunities for corruption and graft. Let us hope that at least fiscal consolidation can be achieved.
Courtesy: The Tribune
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