Government is entitled to some credit for navigating the economy through the global crisis, with a fiscal over-run to salvage growth at 6 to 7 per cent over two years (2008-10) but turned totally oblivious to the build-up over time of inflationary pressures, driven by high food prices since 2008, except to hope that weather and time would bring down prices. In the absence of timely and effective short-term measures to manage the supply situation which could have helped moderate at least cereal prices, the overall inflation has been hardening, as the Finance Minister himself acknowledged in his budget speech , and by February end it had nearly hit double-digit.

The Reserve Bank of India, which has earned a reputation among central banks for its crisis management, has shown a better reading of price signals over the last six months, and began unwinding its accommodative monetary stance in its third quarter review in January. First the reserve ratio, raised by 75 basis points, to 5.75 per cent, and on March 20, ahead of its annual policy statement slated for April 20, RBI sought to anchor inflation expectations by raising key policy rates (Repo and reverse repo) by 25 basis points to 5 per cent and 3.5 per cent respectively. The repo rate was increased after 12 months. The April 20 statement is expected to further tighten monetary stance as even if a surge in inflation looks contained, demand side pressures would become more evident in the coming months, and there are emerging signs of an asset price bubble in the making.

Monsoon and global oil prices are other determinants of price movements. Banks are not in a hurry to increase lending rates and would await the Policy Statement in less than a month. They had already lowered deposit rates making investors play a subsidising role, given the high rates of inflation, consumer and wholesale, affecting the entire populace, not merely the segment below the poverty line which Government claims to be protecting. Both deposit and lending rates would have to go up, no matter the assertions of official sooth-sayers, who invariably go wrong, that prices would ease or fall in two months, on the assumption of a normal monsoon.

The expansionary budget would generate its own demand pressures. RBI Governor Dr. Subbarao says in combating high inflation, a bit of growth might have to be sacrificed in the near term but that would ensure sustained growth over the medium term. Here again, the central bank is moving cautiously without any big bang approach in order not to dampen growth prospects. The 11th plan goals have suffered a setback and the growth target has been revised down to 8.1 per cent from the projected 9 per cent. It might turn out to be slightly less even if the economy manages to achieve 8.5 per cent for this and the final year (2011-12) of the plan.

Plan after Plan, we have seen how assumptions go awry, projects run into cost and time over-runs, typically in vital sectors like power and irrigation, and yet there is no slackening in ambitions. India needs 9 to 10 per cent growth ideally to be in a better position to further increase social sector outlays, make a significant reduction in poverty and raise levels of human development which are at present abysmally low, in some cases even lower than the poorer countries. Inclusive development, to which Government is committed, seems a long way off unless the Planning Commission focusses as much on implementation of socially inclusive plan programmes as on macro-economic issues and policy advice to Government.

There are far too many votaries of high growth from the Prime Minister downwards but fewer to come up with effective governance at all levels to deliver services and make good promises to the citizens, rural and urban. Experience so far with the 11th plan does not inspire confidence that it is going to be different in the 12th plan for which the Prime Minister has suggested a 10 per cent growth target. Most expert studies and analyses come up with long-term projections of an average growth of 8 per cent over the next five years. IMF staff report projects 8 per cent in 2010-11, 7.7 per cent in 2011-12, 7.8, 8.1 and 8.1 per cent per cent for following three years ending 2014-15, the period covered by the 13th Finance Commission with its road map for deficit reduction.

A lower growth has serious implications for both deficit and debt reduction, however commendably Mr. Mukherjee has set the fiscal deficit target at 5.5 per cent of GDP in the budget for 2010-11 and further down to 4.8 and 4.1 per cent in the following two years. This could be possible with some variation if the new fiscal year ends up with 8.5 per cent (which implies several reform policy measures, successful reductions in oil subsidies from a switch-over to market-based pricing of petroleum products and realisation of targeted disinvestment receipts). Aspirations can be expressed in terms of growth targets but we have over the years failed to plug loopholes in translating allocations into physical outcomes.

From the mid-term appraisal, one would hope there would now be greater attention to accelerating infrastructure programmes which are an essential ingredient to achieving desired growth. The big talk includes doubling infrastructure investments to one trillion dollars in the 12th plan. One has to wait and see how far the current plan targets get implemented. It is therefore appropriate that the Prime Minister called for strict monitoring and quarterly reviews by the Planning Commission.

The Budget for 2010-11 has passed through the first stage of consideration by Parliament but there would be many contentious issues when the Finance Bill is taken up by the end of April or early May. The opposition led by BJP is mobilising strength for cut motions which would, without posing any immediate threat to Government, would have to be met by give-and take adjustments. Government does not look any more as being on a strong wicket. UPA's partners, TMC and DMK, have periodically voiced dissent on issues which they view as unhelpful to promote their electoral prospects in West Bengal and Tamil Nadu respectively next year.

With a heavy legislative agenda for the rest of the year, the Finance Minister needs to move with greater political consensus behind him for the long-pending financial sector reforms, in particular, and for piloting the major tax legislation, DTC and GST which are to come into force in 2011-12. He will have to work with States to evolve agreed rates for GST and also bring them around on the compensation issue on which they have raised the stakes with a demand for Rs one lakh crore as compensation for losses under GST, as against the Rs.50,000 crore suggested by the Finance Commission. (IPA Service)