When Finance Minister Pranab Mukherjee rises to present the Union Budget tomorrow, he might as well be performing with the Cirque du Soleil.
Until now the United Progressive Alliance government’s go-to man for crises of all sorts, Mukherjee faces his most challenging balancing act tomorrow, hemmed in by a truculent ally, a fiscal situation that seems as broken as Humpty Dumpty, a central bank – headed, ironically, by a former finance secretary – that has just decided to wait and watch for a sign from Mukherjee, and an Economic Survey, released today, that only makes a half-hearted attempt to hide the warts.
Not to mention a newly-emboldened Opposition that has smelt blood after the Congress' poor showing in the recent Assembly elections in five states.
It is truly Mukherjee’s perfect storm. And to weather it, he must, as the Economic Survey put it, “anchor fiscal consolidation on structural reforms in expenditure”.
Mukherjee’s troubles really started on Wednesday, when Dinesh Trivedi, Railway-Minister-in-limbo as it were, presented a portfolio budget that by most accounts was well-meaning. Instead, he was veering on the edge of political history only minutes later, when his own party disavowed his vision and demanded a rollback of the nominal fare hikes he had announced, and stoking speculation of an imminent collapse of the government.
On Thursday, Mukherjee faced two minor rumblings in the ground under his feet. First, the Reserve Bank of India decided that it would rather wait and watch Mukherjee before making any move to inject much-needed liquidity in the system.
Having cut the cash reserve ration only a week ago, the central bank left key policy rates untouched, meaning that industry will have to wait until April for any easing of the high interest rate regime. To be sure, the cycle has turned with the cuts in the cash reserve ratio, but advance tax payments mean that the liquidity crunch facing corporates will continue awhile.
This means that there will be no major investments by corporates until some time after April, depending on the quantum of the cut.
The worrying part for Mukherjee is that he can’t easily promise any tax hikes, given that corporates are already strapped for funds. Any tax increase will only hurt profitability, and the ability of corporates to make big-ticket investments or expansion that could boost growth and employment.
The lack of such initiatives will inevitably drag the larger economy down, since the public sector is ill-equipped, or funded, to provide any more sops or jobs. Any increase in social welfare spending to offset slow private sector slowdown is fraught with danger – it could send the government’s finances over the edge of the cliff. Already, Mukherjee is headed for a catastrophic increase in the fiscal deficit that has shot up by almost a full percentage point of the gross domestic product.
With gross fixed capital formation, or the value of assets acquired or sold in the fiscal, declining as a percentage of GDP from last year, there is little the government has to show by way of performance.
The Economic Survey, for all practical purposes, gave the government a clean report card, largely blaming global factors for the current situation, as it noted, “While a large part of the reason for the slowing of the Indian economy can be attributed to global factors, domestic factors also played role.” These, not surprisingly, were a tight monetary position due to high inflation. And slowing investment and industrial activity.
The link is clear – a loose monetary policy means higher spending and investment but also higher inflation , often in the form of food prices, the proverbial third rail of Indian politics.
And despite an above-7 per cent GDP growth projection for next year, the Survey doesn’t mince its words about the past fiscal's numbers: “... compared to how India has fared since 2003 and, especially, since 2005, they are disappointing."
Can Mukherjee do better?
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