The priorities outlined in his Rs. ten trillion ($ 205 billion) budget would keep him fully engaged in the coming months, when he has also to finalise with the States the launching of the Goods and Service Tax on April 1, 2010, set the stage for a revised scheme of devolution of central taxes/duties for the period 2010-15, and formulate the roadmap for return to the path of fiscal consolidation, an area of considerable concern at present.

Latest assessments of global prospects, as Prime Minister Manmohan Singh himself points out, are that the “world economy is still a long way from recovering its earlier growth momentum” and the external environment for India would not be “as supportive as before for some time to come.” He sees the need for rebalancing by further strengthening domestic economy for returning to “rapid and inclusive growth” aimed at 8 to 10 per cent over the medium-term.

A similar time-frame is likely in Mr. Mukherjee's roadmap to bring down fiscal deficits to a sustainable level. India has been pitchforked into a fiscal crunch by the inexorable growth in non-developmental expenditures, major subsidies in particular, and compounded by the sixth pay commission award for central government employees and the debt waiver scheme for farmers during 2008/09. At the same time, the economic downturn severely impacted on the economy, quite beyond Government's and RBI expectations in the early stages of the crisis. Large doses of stimulus thus added to the burdens on the budget.

A good chunk of the plan expenditure for the current year, funded by debt, is again in the nature of stimulus to boost demand with expected rise in incomes in the hands of people through the rural employment and other safety net programmes and the tax concessions however marginal. Private funding would not be forthcoming for stimulus. Notably, there is a step-up in efforts to increase in investment in infrastructure, which has multiplier effects. These should fructify for the success of the budget.

A judgement on whether the order of fiscal profligacy involved was justified, should await the outcomes—a grey area to determine to this day - till at least the end of fiscal year. After decades of planning and ever-rising allocations for which every Finance Minister claims credit at the budget time, we are nowhere yet in getting a realistic and credible picture of effective implementation without large-scale leakages and inefficiencies in execution. Mr. Mukherjee is re-visiting this problem and announced the creation of a Unified Identification Authority of India to set up online database with identity and biometric details of citizens to ensure effective delivery of public services. This process, however, might take a couple of years to get into stride.

Mr. Mukherjee has defended the budget as one designed to restore growth momentum, and asserts the planned magnitude of borrowings, would not crowd out private investment as RBI would effectively manage it in a non-disruptive manner. Nor do bankers expect hardening of interest rates in the next few months, as there is sufficient liquidity in the system. His view that market borrowing would not crowd out private investment is not widely shared while international agencies point to risk of the country's sovereign credit rating being lowered if fiscal consolidation is delayed. Fiscal purists at home are uneasy over the “ruinous” rise in deficit and debt levels.

Given the current levels of borrowing which had already nearly doubled to Rs.3060 billion in 2008/09 over the previous year, and is budgeted at Rs.4064 billion (gross), Government must henceforth find fiscal space to strengthen inclusive social and economic development taken to be the mandate from the electorate. This would involve continuous rises in development allocations with enhanced emphasis on rural development and agriculture, and the next budget is only eight months away.

Recovery into the ambitious high-growth trajectory may prove to be more gradual than in spurts. Subject to somewhat optimistic assumptions based on revival from slowdown from the latter half of this year, the Finance Ministry estimates growth to rise from 6.51 per cent this year to 8 and 9 per cent in the next two years. This would bring down fiscal deficit to 5.5 per cent next year and 4 per cent in 2011/12. Even more optimistic is projecting revenue deficit to go down from 4.8 per cent this year to 3.0 and 1.5 per cent within the next two years.

Recent experience does not lend strength to such dramatic drops even when the economy grew by an average of 8.5 per cent. The Prime Minister himself, while returning from G-8 Summit on July 11, said that while he remained confident that India would come out of the global crisis stronger, “the road ahead is going to be a difficult one to traverse”.

One area where the budget gives a definite push is investment in infrastructure comprising highways and railways, power, urban development, rural housing, slum clearance, etc. Steps have been announced in regard to stepping up financing for infrastructure projects and the Prime Minister will head a Committee on Infrastructure to take decisions on projects costing more than Rs.150 crores, fast-track procedures to facilitate private sector investment in specific projects, set targets of performance and review progress of the sector as a whole on a continuous basis. This is all the more necessary after the poor power performance under UPA-1.

Inflation is still below zero for the third month but RBI does not view the negative inflation as structural in nature but as a temporary phenomenon (base effect). Prices also become vulnerable to monsoon behaviour. RBI looks to all variables including CPI which is at 8 per cent as against the below one per cent WPI. Economists do not anticipate a return of inflation for another three months. The prolonged dry spell in Northern India, including the Punjab-Haryana grain bowl areas, after the forecast of near normal monsoon, delayed kharif sowings. The course of monsoon this year is being watched with concern.

On economic policies, the Finance Minister has sought to dispel doubts about Government's seriousness to proceed with disinvestment. A programme of people's participation in the equity of public undertakings would be put through, he has said while also reaffirming Government's commitment to fiscal consolidation once economic recovery has taken a firm hold. Meanwhile, he has to firm up in concert with the concerned Ministries the policy changes he proposed in the budget in regard to the subsidy regime for both fertilisers and petroleum products. At the political level, Government must sort out with its two major allies, Trinamool Congress and DMK, which had voiced reservations on disinvestment while Chief Minister Karunanidhi is additionally opposed to GST being enforced from April 1, 2010. (IPA Service)