Finance minister Pranab Mukherjee has got enough indicators to deliver a ‘tough’ budget. The economic survey tabled in the Parliament today and the Reserve Bank of India credit policy announced earlier cry out for a fiscal consolidation.
A tough budget means raising tax revenue and cutting on government expenditure. A slow growth in manufacturing and industry, stubborn inflation and high interest rates, ever rising subsidies bill all make life difficult for the finance minister.
Political pulls and pressures tie him down further where allies call populist measures that do not let the the finance minister cut spending.
The economic survey highlights the road ahead for the economy. It is a report card on the performance of the economy and works as guidebook for the budget estimates for the next year.
The survey paints an optimistic picture. It says that there are signs from some high frequency indicators that the weakness in the economic activity has bottomed out and a gradual upswing is imminent.
Here are key pointers to the survey:
Fiscal situation: The survey admits slippages in the fiscal outcome for fiscal year 2011-12. The centre’s fiscal slippage was due to rising oil prices and low revenue growth. Subsidies remain a key contributor to the fiscal slippage. Fuel product prices still heavily subsidized and the survey calls for a direct transfer of subsidy for food, kerosene. It calls for a regular adjustment in domestic fuel prices. Looking at the political theatre playing out, this appears like a good suggestion and would stay at that. The government may have to redraw fiscal consolidation timeline and says that rapid fiscal consolidation is the only way to keep inflation down. This clearly means that there is no headroom for RBI to raise rates and control inflation. It also signals that interest rates are peaking.
Subsidies: Major subsidies grew appreciably in 2010-11 and were at Rs 1,31,212 crore. While budget estimates 2011-12 placed them at Rs 1,34,411 crore, given the build-up so far in crude prices, they are likely to be much higher this year. The survey banks on the direct transfer of subsidy on food and kerosene using ‘Aadhaar’ or unique-identification number (UID) scheme to curb pilferages.
Industry: The survey highlights the need for opening up multi-brand retail sector for foreign direct investment. This flies straight into allies of the ruling government as they continue to spike any such move. The survey also calls for large scale investment in infrastructure and calls it an area of concern.
Rupee: The rupee volatility hurts investor sentiment. The survey says that there is a need for more aggressive stance to check the rupee volatility. The government needs to build foreign exchange reserves (currently at $ 259 bn) as the size of these reserves constrain steps to check the fall in the rupee. The current account gap of over 3 per cent is a sign of growing imbalances.
Gold: The economic survey calls for discouraging unproductive imports of gold. There is a growing demand to increase customs duty on gold. There is a clear possibility that the budget could incorporate this suggestion.
Commodities: The survey calls on the government to review the cap on regular farm products import annually. The survey suggests creation of modern grain storage facilities and the need to take perishable farm products out of the Agricultural Produce Market Committee Act ambit. The survey favours a single market fee to promote inter-state farm trade and calls for creating special markets for some crops to increase supplies. The budget could offer incentives for the purpose.
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A tough budget means raising tax revenue and cutting on government expenditure. A slow growth in manufacturing and industry, stubborn inflation and high interest rates, ever rising subsidies bill all make life difficult for the finance minister.
Political pulls and pressures tie him down further where allies call populist measures that do not let the the finance minister cut spending.
The economic survey highlights the road ahead for the economy. It is a report card on the performance of the economy and works as guidebook for the budget estimates for the next year.
The survey paints an optimistic picture. It says that there are signs from some high frequency indicators that the weakness in the economic activity has bottomed out and a gradual upswing is imminent.
Here are key pointers to the survey:
Fiscal situation: The survey admits slippages in the fiscal outcome for fiscal year 2011-12. The centre’s fiscal slippage was due to rising oil prices and low revenue growth. Subsidies remain a key contributor to the fiscal slippage. Fuel product prices still heavily subsidized and the survey calls for a direct transfer of subsidy for food, kerosene. It calls for a regular adjustment in domestic fuel prices. Looking at the political theatre playing out, this appears like a good suggestion and would stay at that. The government may have to redraw fiscal consolidation timeline and says that rapid fiscal consolidation is the only way to keep inflation down. This clearly means that there is no headroom for RBI to raise rates and control inflation. It also signals that interest rates are peaking.
Subsidies: Major subsidies grew appreciably in 2010-11 and were at Rs 1,31,212 crore. While budget estimates 2011-12 placed them at Rs 1,34,411 crore, given the build-up so far in crude prices, they are likely to be much higher this year. The survey banks on the direct transfer of subsidy on food and kerosene using ‘Aadhaar’ or unique-identification number (UID) scheme to curb pilferages.
Industry: The survey highlights the need for opening up multi-brand retail sector for foreign direct investment. This flies straight into allies of the ruling government as they continue to spike any such move. The survey also calls for large scale investment in infrastructure and calls it an area of concern.
Rupee: The rupee volatility hurts investor sentiment. The survey says that there is a need for more aggressive stance to check the rupee volatility. The government needs to build foreign exchange reserves (currently at $ 259 bn) as the size of these reserves constrain steps to check the fall in the rupee. The current account gap of over 3 per cent is a sign of growing imbalances.
Gold: The economic survey calls for discouraging unproductive imports of gold. There is a growing demand to increase customs duty on gold. There is a clear possibility that the budget could incorporate this suggestion.
Commodities: The survey calls on the government to review the cap on regular farm products import annually. The survey suggests creation of modern grain storage facilities and the need to take perishable farm products out of the Agricultural Produce Market Committee Act ambit. The survey favours a single market fee to promote inter-state farm trade and calls for creating special markets for some crops to increase supplies. The budget could offer incentives for the purpose.
....more info