Reserve Bank of India governor Duvvuri Subbarao has been one of those avidly watching the Union budget 2012. After all, by hanging on to his stance and refusing to cut key rates ahead of the budget, Subbarao had made it amply clear that unless Pranab Mukherjee delivered on his hope of credible fiscal consolidation, there was no chance he'd cut rates too much, given the inflationary risks.
The question now is, has Mukherjee delivered on Subbarao's expectations of a move towards 'credible fiscal consolidation'?
Let's look at what the FM said on the areas which are Subbarao's chief concerns:
* Some subsidies, while being inevitable, may become undesirable if they compromise the macroeconomic fundamentals of economy.
* Subsidies related to administering the Food Security Act will be fully provided for.
* Endeavour to keep central subsidies under 2 percent of GDP in 2012-13. Over next 3 year, to be further brought down to 1.75 percent of GDP.
* Fiscal deficit at 5.9 percent of GDP in RE 2011-12.
* Fiscal deficit at 5.1 percent of GDP in BE 2012-13.
* Net market borrowing required to finance the deficit to be Rs 4.79 lakh crore in 2012-13.
* The GDP growth for 2012-13 is being seen at 7.6 percent, +/- 25 basis points.
Are there any concrete signs of fiscal consolidation which will lead to Subbarao getting the confidence to move ahead with cutting interest rates?
While many in corporate India have lauded Mukherjee for his candour and for being transparent and admitting that his figures were haywire and would be brought back on track on a war footing, clearly there is little to suggest any concrete steps towards fiscal consolidation. In fact, the FM's decision to hike service tax to 12 percent, and bring the excise duty to the same level, will also be inflationary.
The minister has also talked of the concept of expenditure reforms: "Effective Revenue Deficit" and "Medium Term Expenditure Framework" statement are two important features of amendment to the Fiscal Responsibility and Budget Management (FRBM) Act in the direction of expenditure reforms, he says in his speech.
The medium-term expenditure framework statement will set forth a three-year rolling target for expenditure indicators. This apart, the recommendations of the expert committees to streamline and reduce the number of centrally sponsored schemes and to address plan and non-plan classification will be kept in view while implementing Twelfth Plan.
The Central Plan Scheme Monitoring System will also be expanded for better tracking and utilisation of funds.
It must be said that given the economic and political realities - the clear and present danger of inflationary risks continuing and a government hemmed in from all sides by a hostile opposition and some allies hell bent on embarrassing it on a host of issues - the noises Mukherjee makes are the best he can do under the circumstances.
While it is true that he has not outlined a more detailed roadmap of how exactly he will go ahead with keeping subsidies within 2 percent of GDP, his repeated references to the need for fiscal discipline are attempts to keep the concerns of RBI in mind.
"Our fiscal balance has deteriorated in 2011-12 due to slippage in direct tax revenue and increased subsidies. On both counts our underlying assumptions at the time of budget presentation last year were belied by subsequent developments. The profit margins came under pressure due to higher interest rates and material costs. This impacted growth in corporate taxes. Further, as against an assumption of $ 90 a barrel, the average price of crude oil in 2011-12 is likely to exceed $ 115. This has necessitated higher outlay on subsidies than projected. The continuing uncertainty in the global environment makes it necessary for us to strike a balance between fiscal consolidation and strengthening macroeconomic fundamentals to create adequate headroom to deal with future shocks," Mukherjee said in his speech.
And there's a candid admission too: "I know that mere words are not enough. What we need is a credible roadmap backed by a set of implementable proposals to meet those objectives."
Sounds suspiciously like he's addressing the RBI governor directly. Perhaps this time, Subbarao may feel that even though clear steps have not been taken, the Pranab Mukherjee's intent of doing the right thing and keeping the deficit in check is genuine. Time for a token rate cut in RBI's April policy?