High growth, however essential to raise revenues and spend more for “inclusive development”, has not delivered equity, given the thrust of policies oriented to catering to corporate interests and richer sections, thereby accentuating income disparities and enabling proliferation of black money with chunks of it stashed abroad.

In the pursuit of faster growth, social considerations had become secondary, the principal objective being fiscal consolidation and earning good marks abroad for prudence. It is this attitude of mind that turned a blind eye to soaring food prices since 2007-08 while supply constraints were cited later on without taking any effective remedial measures. Unchecked, inflationary pressures galloped across the board and remain elevated to earn India caution from international institutions including IMF. RBI’s commended efforts at tackling inflation consistently on the demand side notwithstanding, further monetary tightening has become unavoidable through 2011 with the surge in global commodity, especially food and energy prices. Fiscal policy has to chime in for containing inflation.

A drought in China, floods in Australia and weather-related shortages in other food producing/exporting countries like Russia (wheat), US (corn) and Brazil have caused world food prices to hit record levels. Rising food and energy prices have also begun to push up consumer prices in European Union. Now, inflation is truly a global phenomenon. Risks for many emerging economies relate to overheating, rapid rise in inflation, and possibilities of hard landing, according to IMF’s latest assessment for Asia, where upward pressures on prices are expected to persist in 2011.

The Finance Minister Mr Pranab Mukherjee has talked as though this is all something sudden and more to do with global developments while there is implicit acknowledgement that Government had remained clueless all along. This is reflected in the manner of setting up of an inter-ministerial group (IMG) “to look at the whole range of inflation policy issues, from distribution of foodgrains and vegetables to macro-policies connected to fiscal and monetary matters”. The group, set up by the Prime Minister, is chaired by Chief Economic Adviser Dr Kaushik Basu (who went on predicting fall of inflation through 2010) “to review the inflation situation and suggest corrective measures”. It would look into market intelligence system, monitoring of wholesale and retail prices and develop early warning systems, and provides feedback to the Finance Minister from time to time.

This pre-budget move is to ward off further criticism in Parliament, if the budget session gets started as scheduled with opposition in attendance, but now that elevated inflation is recognized as a major challenge, the budget would hopefully be so framed that it has no inflationary impact whatever. Indeed in the current situation with public opinion turning full tide against the Government’s sins of omission and commission, especially inflation and corruption, the budget could even take on a tinge of populism, especially as elections are due this summer in five states. Also, Government must show it is taking serious notice of the parallel economy and would announce an expert committee to make a study of its dimensions and go into all its ramifications.

Hit by a succession of scandals and pervasive corruption, India’s external image as the fastest-growing Asian economy has suffered badly. The forthcoming budget is an instrument to convey a strong message to prospective investors that Government are in full command, would firmly act against evil-doers and enforce governance and accountability and safeguard macro-economic stability.

For his part, the Finance Minister will not miss the politically volatile situation in the country and would seek to regain some lost ground with a range of goodies. He can advance some tax benefits like higher exemption limit envisaged in the Direct Tax Code to come into force next year and can also effect duty on some essential commodities, besides lowering the interest rate on crop loans of farmers.

Agriculture and Infrastructure are the two critical sectors for sustainable food security and faster development of the economy over the coming years. Government has to get more serious with regard to investments in agriculture, still an under-developed sector despite successive five-year plans, and provide for modernized systems for storage, marketing and food processing, now that food security is to be guaranteed to vast segments of the poor and middle classes. For infrastructure, requiring massive investments, more incentives may be in the works especially to attract greater flow of private investments, domestic and foreign. The Twelfth Plan, beginning April 2012, ought to focus on agriculture and infrastructure along with energy as principal drivers of higher growth.

GDP growth in 2010-11 is projected at 8.6 per cent in the CSO advance estimates. All medium term forecasts for India point to 8 per cent as the sustainable average growth for the Indian economy over the next decade. The Budget for 2011-12 is likely to assume a growth of 8 to 8.5 per cent, giving up the 9 per cent target Mr Mukherjee was keen on. What with an industrial slowdown in the latter half of 2010/11 and rising costs, economic performance will tend to moderate somewhat in the coming year. It will affect revenue buoyancy of the order of current year exceeding budget estimates.

Government had created for itself fiscal space with the one-off revenue from 3G spectrum auction and also rs.40,000 crores from disinvestment in public undertakings to be able to limit budgeted deficit at 5.5 per cent of GDP or even less. Excluding the one-off revenue, the deficit should be more than 6 per cent. It will be quite difficult to lower the deficit to the pre-determined 4.8 per cent of GDP in 2011-12, without some expenditure compression. India’s twin deficits, fiscal and current account, the latter exceeding the norm of 3 per cent of GDP, besides the political troubles may have restrained foreign investors lately.

In a highly inflationary environment, with economy already stretching itself to its potential, fiscal policy has to be less expansionary. Inflation has to be tackled on both demand and supply sides. A tighter fiscal policy is enjoined on India by IMF as well to “cool” the economy while it would also make the monetary policy more effective than at present. There has been no visible take-off in expenditure reform even as incremental allocations are routinely provided for budget to budget with unknown outcomes. The Finance Minister will have nevertheless to contain expenditure if he is to adhere to the projected deficit in fiscal 2012. The only major area where reduction is possible but has proved elusive all these years is subsidies (fuel, fertilizers and food), the second largest outgo in non-plan revenue expenditure. The market-based pricing for petrol has not been extended to diesel – can be ruled out for the present – while the nutrient based subsidy regime introduced last year has not caught on. Already, Government has decided to increase the subsidy for fertilizers in view of the rise in international prices in order to keep domestic prices of nutrients at reasonable levels.(IPA Service)