From tiding over the economic slowdown, the focus in his first budget after UPA's return to power in May 2009, the country now faces serious threats to internal security mainly from Maoists across a vast swath of central and eastern India, but states are also finding themselves increasingly unable to maintain law and order in the face of violent agitations, partly due to indiscreet policy announcements as in the case of Telangana, and other sectarian eruptions. Given recurring strikes by terrorists, a heightened sense of alert now pervades the country. India has equally to be on guard on its extensive borders. While all this may not affect the economy directly, the augmentation and modernisation in terms of security and defence will throw additional burden on budgetary resources.

The economic scene may look more hopeful with recent data on manufacturing at 16 per cent in December and CSO's advance GDP estimate of 7.2 per cent for the current year. The export decline has been reversed. But there are many negative factors to detract from overall optimism. Growth in manufacture is not broadbased but mainly reflects the surge in capital goods and consumer durables. The auto industry is exceptionally doing well and car sales are on a roar. Yet, carmarkers would not like an immediate exit from stimulus as much as telecom operators, NBFCs and other infrastructure lenders, exports and MSE sectors. For the economy as a whole, the worst is not over yet and the budget will thus seek to consolidate the emerging gains, but with a gradual exit from the sizeable stimulus package extended till March 31, 2010.

Growth and Inclusive Development will remain the overarching objectives and should receive greater focus in the Budget, now that India is past the phase of slowdown in 2009-10 which can end up with a GDP rise between 7 and 7.5 per cent. The budget will be built around a growth estimate of 8 per cent in 2010-11 with a modest increase in budgetary support for the plan to take care of incremental allocations for the flagship programmes. But the global economic environment may not be supportive of growth in developing countries because of uncertainties in the post-recession recovery processes of advanced nations struggling with a mountain of debt and deficits. Financial markets are unstable and credit crisis has not been fully overcome while international oil and commodity prices are on an uptrend which would accentuate inflationary pressures in emerging nations. External demand would remain weak at least over the short term for any strong recovery in developing country exports.

Above all, India is now well and truly in a high inflationary phase and Mr Mukherjee can do little with his budget to contain the price upsurge, beyond perhaps laying out a structural reform agenda for agriculture to raise productivity and farm incomes. WPI had risen by 8.9 per cent in the current fiscal year till January, with no softening in food and other primary product prices hovering around 18 per cent. It is more likely that the year-end rate of inflation would exceed RBI's target of 8.5 per cent. Indeed this has held up Government's price revisions for oil products at this stage, however justifiable it may be to cut down huge losses and subsidies. In any case such moves encounter resistance not only from the opposition parties but also some allies in UPA bandwagon, playing vote-bank politics.

What the Finance Minister would, therefore, attempt to do is to come up with a strategy which is growth-oriented with incentives and policy refinements to attract investments, domestic and foreign, especially for infrastructure development, while maintaining the traditional pro-poor image. At the same time, he would reaffirm Government's intention to proceed with financial and other capital market reforms which would be taken up during the year. He is expected to make an immediate start with fiscal consolidation, pegging the deficit in 2010-11 at 5.5 per cent, and lay out a road map to bring the Centre's deficit to 3 per cent of GDP. This would be on the lines of the 13th Finance Commission's recommendations in this regard.

To make it possible, he would assume a substantial mobilisation through disinvestment and 3G auction under non-tax receipts as both the path-breaking revenue measures, Direct Tax Code and GST, will not form part of this budget. But on balance, he may move forward with some elements in Direct Tax Code such as a higher exemption limit and also effect some changes in the excise and service taxes within the confines of GST as applicable to the Centre. Any major reduction even in non-food subsidies such as in oil products and fertilisers, seems unlikely, given the Government's inability to take decisions under political compulsions.

It is deplorable that Government is unable to act upon its own declared intentions. In the last budget, he announced a committee to propose a viable and sustainable system of pricing of petroleum products. That committee headed by Mr. Kirit Parikh having reported on market-based pricing system and on immediate revisions of petrol, diesel and LPG prices, the Government deferred decisions hoping to build consensus on at least increases in petrol and diesel prices so as to reduce losses for the oil marketing companies and the subsidy outgo. The Finance Minister must throw light in this area, on scaling down subsidies other than food, especially fertiliser after his commitment last year to introduce a nutrient-based subsidy which will be directly transferred to the farmers. Subsidy reductions will be evidence of expenditure reform, as important as revenue mobilisation, in achieving fiscal consolidation.

For the whole of 2009, Government could not bring about any moderation in price pressures, conveniently attributed to monsoon failure, through supply side measures though some steps, if ineffective, were taken like export restrictions or zero import tariff and belated release of stocks for open market sales. The Reserve Bank of India which has already begun withdrawing accommodative monetary stance and greatly seized on the subject, will decide on the question of key policy rates when it announces the Monetary and Credit Policy for the next fiscal year, on April 20, taking into account the budget measures and the borrowing magnitudes and WPI and CPI trends in the coming weeks. (IPA Service)