The pre-Budget season has kicked off with a raft of good news. Direct tax collections have been unusually buoyant, growing by over 40 per cent so far this year and trebling in the last four years, thus making it possible for the government to not only fund big-ticket programmes but also to reduce the deficit. Inflation is under control, at about 3.5 per cent for wholesale prices, though this is only because petroleum product prices have not been increased to reflect their true cost. In fact, the buoyant revenues probably give the government enough headroom to fund oil subsidies through the Budget, as a more transparent means of financing.
Meanwhile, industrial production has been more buoyant than might have been expected, growing by 9.7 per cent in April-November. Even exports have borne up quite well, growing by 22 per cent in dollar terms during the first eight months of the financial year, despite the 12 per cent appreciation of the rupee against the dollar in 2007. The trade deficit has ballooned, of course, but the broader current account deficit is well under control because of software exports and remittances continuing to grow.
Surveys of business opinion show a resurgence of confidence, and along with this the full order-books of capital goods manufacturers suggest that investment activity is still strong. Corporate results have of course reflected some loss of tempo in recent quarters, and the third quarter results to be announced later this month will be watched keenly. But with corporate tax revenues as buoyant as they have been, the numbers cannot be bad. The stock market too reflects strong optimism, with various stock indices ruling at record levels and the Sensex stocks price-earnings ratio standing at an ambitious 27 up from a less heady 21 a year ago, and a positively modest 17 a year before that.
With the agricultural year also likely to be better-than-average, the finance minister may well be proved right in his upbeat forecast that GDP growth will be 9 per cent for the third year in a row something that no one else has so far had the courage to predict without qualification. The icing on the cake is that global economic growth in the calendar year 2007 was a handsome 3.9 per cent, up from 3.6 per cent in 2006 despite all the troubles in the financial sector. While everyone expects things to slow down in 2008, India should be perfectly comfortable even if global economic growth is no more than 3 per cent.
Meanwhile, the government and the Reserve Bank have been able to tackle the asset price bubble to some extent, insofar as it relates to real estate, and commercial banks have slowed down their expansion of credit, from the unsustainable levels of 30 per cent and more that had prevailed for the previous three years. These developments put the macro-economic situation in better balance without causing any hard landing. Overall, therefore, this is a far happier position than most observers would have expected six or eight months ago, and it sets the stage nicely for the UPA governments last Budget. In a pre-election year, the Budget will be watched mostly for the damage it does through populist giveaways. If the floodgates are not thrown open, and fiscal rectitude is maintained, the economy will have been well served.