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Run-up To The Budget: Finance Ministers dilemma
February, 12th 2010

Around this time last year, Finance Minister Pranab Mukherjee, along with his North Block mandarins, was in a benevolent mood. Not that there was any alternative. The prime challenge was to mitigate the impact of the global financial crisis, which had engulfed almost all sectors of the economy and to combat which two stimulus packages were already put in place -- a mega package in December 2008 followed by another in January 2009.

In a sense, the interim budget 2009-10 -- the fifth and last of the United Progressive Alliance government in its first term but Mr. Mukherjees first as Finance Minister -- was yet another stimulus package of sorts, apart from an exercise to apportion essential expenditure for the first four months of the fiscal year in view of the general elections in May. While continuing with certain social sector programmes to lessen the impact on the poor and facilitating increased spending on infrastructure projects, Mr. Mukherjee also detailed the steps the new government would have to take to sustain the growth momentum.

Coupled with the fiscal packages by way of huge cuts in excise duty and service tax aimed at propping up consumer demand and keeping the wheels of industry moving so as to pre-empt job cuts, the Reserve Bank of India pumped in adequate liquidity by lowering its key policy rates. As a consequence, by the time Mr. Mukherjee was to present the UPA governments first regular budget for 2009-10 in its second term on July 6, the economy had already started showing green shoots of recovery in key sectors such as steel, cement, auto and consumer goods.

What appears to have essentially paid off was the high priority given to infrastructure development as the increased investment led to rapid growth and employment generation in urban and rural areas. Through the four packages announced during the fiscal year ever since the global meltdown, the government had provided an overall stimulus of nearly Rs. 2,18,000 crore to the economy. The bulk of this was directed at investment in urban and rural infrastructure, as well as aam aadmi-centric programmes such as the NREGA for providing guaranteed employment, Bharat Nirman and other village development programmes.

Alongside, while the farm debt waiver scheme was extended to ameliorate the hardship of farmers on account of the late arrival of monsoon, the excise cuts on various FMCG (fast moving consumer goods) products and autos resulted in higher demand for such goods even in rural areas. That the stimulus packages worked, although with a lag effect, is clear from the growth data, both for industrial production and GDP (gross domestic product) figures.

In particular, the second quarter data surprised one and all with a 7.9 per cent GDP growth and as the third and fourth quarter numbers are expected to be better -- despite the negative growth in the farm sector -- the overall growth for the entire fiscal is officially estimated at 7.2 per cent. This, it appears, is an under-estimation as the Finance Minister and Prime Minister Manmohan Singh are anticipating a growth of 7.5-7.75 per cent.

And that brings the Minister to the biggest challenge while presenting the budget on February 26 for the new fiscal. To adhere to his own budgetary target of bringing down the fiscal deficit to 5.5 per cent in 2010-11 from the unsustainable 6.8 per cent of the GDP in the current fiscal, Mr. Mukherjee will have to raise adequate revenue to fund the inflation-adjusted higher expenditure allocations. For this, the stimulus measures -- excise and service tax cuts -- will have to be withdrawn. He had gone on record saying that the stimulus measures would not be withdrawn until there are clear signs of a firm global recovery and the growth pick-up in the domestic economy is sustained.

Food inflation
All would have been fine, but for the spiralling food inflation which is currently hovering around 18 per cent and may go up further to the decades high of 20 per cent touched in December last year. While this is already burning a deep hole in the common mans pocket, worse is the fact that it may seep into the overall WPI inflation which touched 7.31 per cent and is expected to go over nine per cent by March-end this year. The RBI, while sucking out excess liquidity to the extent of Rs. 36,000 crore by raising the CRR (cash reserve ratio), has given enough indications that a phased exit of stimulus is essential.

Mr. Mukherjees dilemma, however, is whether the exit would affect the growth process. For, no one is sure whether the faster pace of economic recovery is owing to the stimulus packages or can be sustained without the sops.

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