Budget 2011: With some luck, it should work out

The budget should be evaluated in terms of what it was expected to achieve. From the macro-economic perspective, the budget was to bring about growth and control inflation while keeping within the FRBM limits. Has it achieved this troika?

The budget has focused on growth in a semi-Keynesian manner; pump priming to spur the economy. Here, the FM has kept the deficit under control but has channelled the expenditure into making it work more efficiently.  The focus is on infrastructure and agriculture, which is appropriate, given that these have been two lacunae in our system. This will help to increase investment as well as generate output in the medium term of 2-3 years. The focus on farming will ultimately help to improve logistics and make supplies more resilient. Therefore, the impact on inflation will be felt with a lag while growth would be more instantaneous.

The tax changes have been largely neutral even though there has been a marginal increase in excise on certain items. The inflation impact is not expected to be significant on this score and the marginally higher income tax saved by the raising of the income tax exemption limit would negate this impact. Going by the textbook one would call this a Pareto optimal situation where some are better off while no one is really worse of under the new tax rules.

There are, however, three qualifications that must be made here. The fiscal deficit has been a challenge. This is commendable, though we are bargaining for high growth to garner the revenue needed to lower this ratio. Presently, the GDP growth rate has shown signs of slowing down with interest rates being high. Industrial growth has been resilient so far, but one is not sure if there is an inflexion point after which it will be impacted by interest rates.

The other risk factor is disinvestment. The FM has placed the target again at Rs40,000 crore, and any slippage would mean that the deficit will increase again.

The third pertains to oil prices. The budget has not taken into account the possibility of oil prices spiralling and leading to higher fuel prices. What will the policy be like then? If prices of diesel, LPG and kerosene are not to be increased then the budgetary support has to increase through subsidies.

Therefore, with a bit of luck, these numbers should work out well for us.

Madan Sabnavis is chief economist, CARE Ratings.