Opinion The FM’s dilemma

So here is the big paradox Finance Minister Pranab Mukh-erjee faces: how can he come up with a budget which remains growth-oriented and is yet non-inflationary? This question will bother the finance minister for longer than we can imagine. Delivering high growth with low inflation is now a structural issue which one budget cannot resolve. However,this budget can start to lay down a roadmap for delivering reasonably high growth with low-to-moderate inflation.

Delivering non-inflationary growth will require a special set of reforms which have become politically critical now. On these will depend the smooth survival of the UPA over the remaining three years of its tenure. There is little doubt that another year of high food inflation will be politically disastrous for the ruling alliance.

Pranab Mukherjee will have to show a strong commitment to non-inflationary,growth-oriented reforms for another reason. There is a growing perception among businesses that the UPA has given up on reforms that are required to broad-base the economy further in an orderly manner.

The agriculture economy has to be expanded on a war footing to deliver non-inflationary growth. The current episode of high food inflation has reinforced some home truths: the long-term supply response from the agri-sector has been poor,and is not keeping pace with rising incomes and demand. This problem is not new and has been deliberated upon.

In his 2010-11 budget,Pranab Mukherjee said that the government had laid special emphasis on spurring agri-growth by drawing up a strategy to “extend the green revolution to the eastern region of the country and by organising 60,000 pulses and oilseeds villages in rainfed areas of the east”. However,one has not heard much from the government as to how the strategy of extending the green revolution to the rainfed eastern region is working,if at all. This is the kind of project to which the prime minister and finance minister must lend their political weight,in the way the government did to the first green revolution decades ago. Somehow,that level of commitment seems to be missing these days,even though the problem of stagnating agriculture supplies is quite well known.

Another big challenge for Pranab Mukherjee will be how to keep the UPA’s commitment of increased allocation to key social sector programmes such as NREGA and food security without further stoking the inflation caused by supply constraints in agriculture. For instance,recently,the government proposed that it will link the payments under the rural employment guarantee scheme to the Consumer Price Index. Now this will justifiably result in more money being put in the hands of rural labourers. However,if the supply of agriculture products remains stagnant,it will further stoke food inflation in the short to medium term. It’s the same story in the legislated food security programme which,in its current format,can be implemented smoothly only if foodgrain production is of a much higher order.

At a more macro level,Pranab Mukherjee is under severe pressure to consolidate the rising fiscal deficit as a means to lower inflationary expectations. The RBI,in its monetary policy statement last fortnight,has clearly pointed to high inflation as the main risk to growth and has called upon the Centre to use its fiscal instruments to complement the central bank’s effort to lower inflation expectations.

Pranab Mukherjee had delivered liberal doses of fiscal stimuli in the previous two budgets as the world economy remained shaky post the global financial crisis. One of the key outcomes of the liberal fiscal and monetary policies pursued around the world since 2009 is high inflation,which emerging economies,particularly,are grappling with. So clearly it is time for some roll-back of both monetary and fiscal boosters in emerging economies. India cannot escape that process,as inflation is the biggest tax on the poor.

The government ran a high fiscal deficit (its gross borrowings) of 6.8 per cent of GDP in 2009-10. This financial year the fiscal deficit target is 5.5 per cent of GDP,which translates to a budgeted gross borrowing of Rs 3,81,000 crore.

The finance ministry says it will remain within its borrowing target this year. This claim however hides the fact that it got a bonanza Rs 1,00,000 crore from auctioning spectrum and a large part of this was not budgeted as a receipt. If this receipt is taken out of the equation the fiscal deficit would indeed overshoot the target. Also there are hidden oil and fertiliser subsidies of over Rs 1,50,000 crore this year. There is no knowing how the government will adjust these amounts as it now stands committed to be transparent about subsidies.

So the overall picture that emerges is that Pranab Mukherjee will find it very difficult to present a non-inflationary budget,especially with all the new expenditures that the UPA is committed to as part of its political agenda. And historical evidence shows no economy in the world has been able to deliver high growth with high inflation for a long time.

At some point,higher inflation starts to affect growth and hurt the poor. This is the biggest risk the UPA faces in the near term.

The writer is Managing Editor,‘The Financial Express’

mk.venu@expressindia.com