Budget 2011 outlook: Govt likely to address only the near-term problems
February, 07th 2011
Current macroeconomic challenges are manifold. Inflation, including that for essential commodities, is high. Interest rates are on the way up. Domestic financial sector liquidity remained under stress, often excessive, for bulk of the current fiscal. Likely large government borrowing on top of that can potentially be a dampener for private investments, which, in turn, will raise doubts about growth sustainability.
With elevated current account deficit and uncertainties around future FII flows, the overall balance of payments ( BoP )) looks weaker in the recent months. The government is being criticized heavily on corruption issues. The upcoming elections in some of the major states, pundits fear, may prompt the government to turn extra-populist in the coming budget.
Attaining the sub-5% fiscal deficit target in 2011-12, as prescribed by the Fiscal Responsibility and Budget Management ( FRBM )) Act, looks next to impossible. The expenditure pattern of the government is fairly sticky with nearly 60% of the total spending being incurred on interest payments, subsidies, defence, wages and social sector schemes. In fact, subsidies can spring an upside surprise with elevated oil, fertiliser and food prices.