Analysis of Indian Union Budget 2010-11

The Union Budget 2010-11 was another remarkable landmark in the long political history of Finance Minister Pranab Mukherjee. He has maintained many of the union government’s large fiscal policies and has further provided relief to the rising earning middle class of India. Thus, in a broader sense, a totally consumption-based model for growth has been pursued. In other words, the budget allows both rural and urban populace to have more money to spend and continue this remarkable economic boom we have seen in the last decade.

The Finance Minister is looking to close this economically historical decade, by targeting the high growth rates we have been looking to get from the start of the millennium. The target looks "refractionally" even higher thanks to global recession. But, India has done well to decouple itself from the profligate West and its government’s prudent and somewhat conservative outlook has paid off enormously.  

India’s amazing recovery growth story is not just another milestone, but has many signs to read. 

The first is how India has strong domestic consumption and its economy may not be as dependent on exports, as it first appeared. Second, it places India at the centre of the global economic rebalancing along with China, taking in favour of Asia. Third, it sets a precedent of kinds to other political bigheads who are yet write economic policies, to maintain populist fiscal measures.

The annual budget announcement has become a major part of an ordinary citizen’s life today, with due credit to the Indian press, who seem to forget every other news happening for a week or so. But, why not! People’s budget expectations are so necessary in the spirit of the democracy and are what I believe to be the biggest ‘RTI’ of all. Can you think of any other occasion in a year which allows people to make the government to be more accountable to them? Perhaps not, and so I wish to support the further cause by breaking the budget and to even cover issues not usually spoken about in the media as well. So let us begin this, by having a look at the government’s bottom line first.

Taming the Fiscal Deficit

The most important announcement which was eagerly awaited by all was the call to restraint the growing fiscal deficit. The fiscal deficit was being chiefly blamed for the high levels of inflation India has witnessed over the last 6-8 months. However, I am of the opinion that there were many other serious administrative problems which were major aggravators.

So as expected the finance ministry has simply cut, copied and pasted the 13^th Finance Commission’s recommendations and targets. (See the chart for more clarity). The finance minister has committed to bringing down the fiscal deficit 2009-10 level of 6.7 % of GDP to 5.5% of 2010-11 GDP. Also the government has remembered to realign itself with requirement of the Fiscal Responsibility and Budget Management Act of 2003. The government has announced to bring down the deficit to 3% level by the end of next 4 years. 3% target is under the rules of the Act. Although, I think the Act will give more leeway to the FM to dictate his sudden austerity mood swings!

The Union government was well on track to achieve its FRBM targets till the global financial crisis came about. The government had to quickly change gears and announce huge expansive fiscal policies to maintain growth. 

For the year 2007-2008 the budget deficit was just 2.6% of the GDP. However, going back to such levels will take much longer than what it took to go up.

The foremost reason being, that a calibrated and planned approach will steer clear of the uncertainties over crowding out private investment. Furthermore, the danger of Japanese like bust on pre-mature withdrawal of government support. Second, being the political will required to renounce the populist policies. After all they all stand for re-election.

The budget has done well to quell fears of high fiscal deficit led inflation. We will see the results over the next 2 quarters. I still have my doubts on its inflation tackling effects. Nevertheless, words must be converted into action. Or like Obama says,” Words must mean something!”.