Seeking the right balance
The Union budget has sought to send a message that the government will do all it can to rein in inflation even while maintaining the growth momentum. The Prime Minister had made the point earlier that no government can be oblivious to the objective of ensuring price stability without hurting the growth process. However, as all recent monetary policy statements have been articulating, the pursuit of both the objectives calls for a deft balancing of the often conflicting options. For instance, higher interest rates are necessary to contain inflation but are detrimental to economic growth. It is clear from the budget proposals that the fiscal policy too is seized of a similar urgency in stimulating an economy that is slowing down and vulnerable to a resurgent inflation. There are downside risks from the external environment. While the consequences of the U.S. sub-prime crisis on the Indian economy are not yet clear, high food and commodity prices, including that of oil, pose significant supply side risks and are inflationary. The budget envisages several measures to boost domestic consumption. One of the key drivers of the spectacular GDP growth over the past four years, private domestic consumption has been lagging during the current year. The adjustment in income tax slabs should increase the disposable incomes of the middle class estimated at 250 million. The considerable step-up in the allocation of funds for Bharat Nirman and other social sector schemes will also boost consumption. So will the reduction in CENVAT and specific excise duties such as those on small cars and two wheelers. Over the past 18 months, domestic interest rates have risen as the RBI pursued a vigorous anti-inflation policy. Both consumption and manufacturing have been adversely affected. The government's commitment to fiscal rectitude should help ease interest rates. In fact, a vastly improved picture of public finance is seen in the lower public borrowing projections for 2008-09. However, the off-budget subsidies on food and petroleum do not figure in the government's estimates of the fiscal deficit. Also it is not clear how the government proposes to compensate the banks for the Rs.60,000 crore write-off of farm loans. Both public and private investments have been rising as a share of the GDP but their growth would seem likely to moderate. Continuing the attempts at removing infrastructural bottlenecks and upgrading the skills of the young workforce will help in removing supply-side bottlenecks. Along with the emphasis on agriculture and rural development, they hold the key to more inclusive growth with stability.
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