Mar 13, 2012 at 12:15pm IST

Budget 2012: Time to take fiscally prudent decisions

As this edition of Forbes India was going to bed, India's executive set-up was in intense negotiations with political decision-makers over the contents of the government's most-awaited policy pronouncement—the Union Budget.

The Planning Commission and other advisors to the government were ranged on one side, with the National Advisory Council headed by Congress president Sonia Gandhi on the other, and the Prime Minister's Office believed to be playing mediator. The question being debated was providing food security to every resident Indian.

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The NAC wants every citizen to have the entitlement, but those in the government are wary of the enormous strain it would put on the country's fiscal health. A person privy to the consultations says that both sides have understood the positions and were showing willingness to compromise. The NAC, for instance, has climbed down from its position of implementing 'its version' of food security to having some form of food entitlement. That has been accepted by all.

Budget: Time to take fiscally prudent decisions

FOOD FOR THOUGHT: A worker spreads paddy crop for drying on the outskirts of Ahmedabad. Political decision-makers are now debating the best way of providing food security to every Indian without upsetting the precarious balances of Central finances (Image: Amit Dave/ Reuters)

Now, the struggle is to find the best way to do it without upsetting the precarious balance of Central finances. Food security for all would at least double the current subsidy of about Rs 64,000 crore, raising the fiscal deficit to unmanageable levels and making the country unattractive to investors.

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Yet, food security, along with universalisation of secondary and higher secondary education under the Rashtriya Madhyamik Siksha Abhiyan, remains the most important policy around which this Budget will be constructed.

The government is already expected to miss the fiscal deficit target of 4.6 per cent of GDP by at least 80-100 basis points. In its review of the economy released on February 22, the Prime Minister's Economic Advisory Council (PMEAC), headed by former RBI governor C Rangarajan, indirectly admitted that the fiscal deficit is at around 5.5 per cent.

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"The Thirteenth Finance Commission has set the target of containing the fiscal deficit at 3 per cent of GDP for the Central government by 2014-15 and that would require compressing the fiscal deficit by about 2.5 per centage points over the next three years," the Council said.

There is a growing acceptance that this Budget will be the last occasion to come clean and lay bare the facts, however bitter they are. That means no window-dressing and sleight of numbers. And the ball is in the finance minister's court, as the Reserve Bank of India, stated bluntly in its last review.

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The Central bank said the government should put its finances in order so that capital could be used to create productive assets such as industries and infrastructure. "The forthcoming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way," the RBI said in its third quarter review of the economy in January.

The Central bank and other top bureaucrats have warned the finance minister and Prime Minister that the economy risked returning to the fiscally radioactive pre-reform days when the seventies' and eighties' profligacy had brought it to the brink of implosion.

"The fiscal situation in the country is a cause of serious concern," the PMEAC said in its review. "At present, it is not very different from the precarious position that existed in 2001-02," it warned, advising that the government should enhance tax revenues, contain subsidies and transfers and increase social and physical infrastructure spending. "These require decisive and tough measures and the government must initiate them in the forthcoming Budget itself to bring the economy back on the high growth path."

They have argued that if food subsidy were to increase, something else—such as fuel subsidy—has to go. That is why economic analysts were happy to hear finance minister Pranab Muhkerjee say he is "losing his sleep over the rising subsidy burden".