Amid uncertainties, with IMF not ruling out new global financial stresses, Finance Minister Pranab Mukherjee's budget exercise for 2010-11 will seek to strike a delicate balance reconciling the growth imperative with a credible start in fiscal consolidation. Recent economic data hold promise of sustained recovery except for the persistence of inflationary pressures.

Government seemed soporific for months before waking up on January 13 to the threat of generalised inflation from the double-digit rises in food indices, unmindful of the havoc it has wrought on low-income groups. Whatever the impact of the supply-side measures that have now been firmed up by Government, the danger signal has already come from the 7.3 per cent rise in WPI in December (over 4.78 per cent in November) and 8.02 per cent so far in the current fiscal year. But 'food articles' on a continuous drive-up was 17.08 per cent at the end of 2009. The manufacturing index is also showing a rise in tandem.

No longer can inflation be sacrificed at the altar of growth, as a former Deputy Governor of RBI, Mr. S S Tarapore points out. RBI is now widely expected to move further on the unwinding strategy it initiated in October-end and raise the cash reserve ratio from the present 5 per cent by at least 0.50 per cent to reduce excess liquidity. It may not overlook the emerging developments on the price front, given the steady rise in international oil and other commodity prices, even if it would not hasten to lift policy rates in its third quarter policy review on January 29.

The Asian Development Bank, in a new report, takes a more optimistic view of the global economic outlook than IMF, and says despite underlying fragility in advanced economies, Asian region would grow by 6.6 per cent in 2010 as against 4.5 per cent in 2009. The studies ADB commissioned estimate India's growth at 7.3 per cent in 2010 and China's at 11 per cent with a general warning that “overly loose fiscal and monetary policies could pose risks of overheating and rising inflationary expectations”.

In view of fragility in global economic recovery and the still high risk of financial and other shocks in global environment, the study says, India needs to address policy towards further strengthening economic resilience. In particular, it needs to address its fiscal position. At the same time, on monetary policy, the study suggests more emphasis on inflation control. Instead of two primary indicators of inflation, it said, RBI should shift “to a single and more comprehensive index which measures the actual price consumers pay. An updated version of the CPI should be used as the measure of inflation”.

No major tax reforms are likely in the budget being presented to Parliament on February 26, as a public debate precedes the new Draft Tax Code slated for implementation in 2011 while the more innovative Goods and Services Tax (GST) designed to make India a single market is yet to be finally agreed between the Centre and the States. The Union Budget can still make a cautious start with central rates now that there will be two different slabs for the Centre and the States, without overly impinging on the reliefs provided as part of fiscal stimulus. Industry, business and export sector would still look for a continuation of the stimulus. CSO's GDP growth estimate for the third quarter (October-December) would be available when the Finance Minister presents the budget.

A major change in the 2010-11 Budget will be the revised scheme of devolution of Centre's tax revenues to states in terms of the recommendations of the Thirteenth Finance Commission headed by Dr. Vijay Kelkar for the next five-year period (2010-15).

The Finance Commission has also proposed a road map for fiscal consolidation. Government had indicated that fiscal deficit would be held at 5.5 per cent of GDP in 2010/11 as against the budgeted 6.8 per cent of GDP in the current year. The revised estimate may not vary sharply because of unspent balances under programmes, the “austerity drive” and significant disinvestment receipts to be realised before the end of March.

The steady recovery in manufacturing in recent months, even if limited to certain segments, like consumer durables and intermediate goods, and export growth turning positive after 13 months of decline provide some of the hopeful pointers of recovery taking hold. The current year has also seen a strong revival of investment flows, especially portfolio investment flows totalling 24.96 billion dollar (of which FIIs accounted for over 19 billion) in the first eight months (April-November) while direct investment was around 25 billion dollars. There was also a significant increase in NRI deposits in 2009.

Speaking in Washington on the world economic outlook (which IMF will update on January 26), the Fund's Managing Director Dominique Strauss-Kahn said while emerging market economies—especially in Asia—were leading the recovery, most advanced economies were still sluggish, with private demand weak and joblessness continuing to rise. “We are not out of the woods until the private sector has recovered,” he said.

The world pulled together and redeemed the promise of international cooperation to pull the economy from the brink.

The IMF Chief said 2010 must be year of transformation to “complete the global project to address the failings in regulation, economic policy, and governance that lay behind the crisis.” Regulation and financial sector supervision needed to be not just stronger but smarter. Policymakers should not forget the roots of the crisis. He welcomed US President Barrack Obama's proposal for a fee on major financial firms to recoup losses (estimated at 120 billion dollars) for the tax-payer from the Federal bail-out of the financial system.

In a paper calling for reduction of India's public debt, one of the highest at 78 per cent of GDP in 2008/09, IMF urges this needed to be lowered to a range of 60-65 per cent by 2015/16, though it would still be above the average for emerging markets. It would then be within a range of debt ratios that would provide room for counter-cyclical policy and contingent liabilities. Discussing scenarios for such reduction, the paper says subsidy reform alone has potential for significant dividend in terms of fiscal consolidation - debt ratio at 65.9 per cent and fiscal deficit at 4.4 per cent. A combination of subsidy, other reforms and privatisation (disinvestment) would help achieve debt ratio reduction to 59.5 per cent and fiscal deficit at 3 per cent of GDP. (IPA Service)