NREGA lifted consumption, not productivity: Crisil

What should be the top priority of the government as it prepares its highly-anticipated Union Budget?  According to DK Joshi, chief economist at Crisil, it’s fiscal consolidation.

Like several other economists, he notes that it is not just the fiscal deficit number that has soared out of control but also the composition of the government’s expenditure, which has favoured consumption over investment.

The main challenges, therefore, for Finance Minister Pranab Mukherjee will be to rebalance that expenditure as well as cut the fiscal deficit per se.

How can the government rebalance spending? By cutting subsidies and directing more spending into investments, says Joshi. However, both steps require reform measures to be announced.

As a first step, it’s likely that the government initiates reforms in diesel pricing. In other words, a diesel price hike could be announced.

A credible deadline for the implementation on the Direct Tax Code (DTC) and the Goods and Services Tax must also be announced in the Budget, Joshi says, adding that he expects DTC to be implemented in the new financial year starting 1 April.

Given that inflation has become a key concern for the economy, he believes steps need to be taken to cool prices by improving supply. Agricultural reforms, in this context, are highly critical, he adds.

Until now, the focus of agricultural reforms has been to provide more credit to farmers; little attention was paid to offering  technical support such as improved irrigation facilities. The government needs to increase its focus on the agricultural supply chain, Joshi says, if it wants to lower inflation.

He also points out that in terms of government spending, there is a case for taking another look at employment guarantee scheme NREGA since it has had been more successful at raising consumption than economic productivity.

Overall, the Budget announcements still matter, says Joshi, because it (Budget) provides the platform for the government from where it can chart out a credible fiscal policy and issue economic estimates.

See more Budget 2012 videos and expert views on Firstpost: Ajay Shah , Rupa Rege Nitsure , Indranil Pan , Surjit Bhalla , Ashima Goyal .