Budget 2012 could be Pranab's easiest: he has no options

It’s a fair bet that barely days ahead of Budget 2012, Finance Minister Pranab Mukherjee has already wrapped up all but a few of the micro-details of the policy proposals that he will lay out this year. Budgets should not - or ought not to be - be remembered for their mind-numbing minutiae. Instead, they ought to lay out the larger philosophical economic orientation of the government, chart out a roadmap and show up a credible path towards a realisable goal that leaves the economy in a better zone.

On that count, Pranab-da’s budget for this year virtually writes itself: the economic priorities were never more stark than they are this year, and the elbow room for the government, even one so cavalier at this one, to go on a spending binge is limited.

The Indian economy today confronts three major challenges: a cyclical slowdown in growth, triggered by a choking up in private investment, which could be accentuated by any turmoil in the global economy; the lingering effects of untamed inflation, which has inhibited the RBI from lowering interest rates and which could be compounded by geopolitical risk in West Asia and excess liquidity that is driving up commodities markets; and the structural hangover of fiscal profligacy, and the build-up of enormous subsidy bills and mounting deficits arising from the lavish spending and ill-directed programmes undertaken at precisely the wrong time.

Having boxed itself into a corner, the government has no option but to use Budget 2012 to begin a long-term process of fiscal consolidation, without which - as the RBI has warned - the interest rate cuts that are needed to revive growth stand no reasonable chance.

The RBI’s 75 basis point cut in Cash Reserve Ration on Friday effectively puts off any decision on rate cuts until after the budget; that decision will hinge critically on whether the government lays out a credible path towards taming subsidies and generally bringing its deficits under control.

To do that, however, Pranab-da must have a grown-up conversation with we, the people, and acknowledge the government’s many failings that have led us to this mess - and cramped the space for him to do more to revive the economy while simultaneously compelling him to raise revenues across the board, as he is certain to do this year.

Much of the expenditure blowout this year has been due to the bloated subsidy bill - expected to be higher this year by 1 percentage point of GDP - on food, fuel and fertilizers. The saving grace is that non-subsidy spending, in the areas of defence, for instance, will come in lower than budgeted and provide some buffer from the slippages under other heads.

Even if Mukherjee doesn’t increase allocations under the Food Security Bill, it’s virtually untouchable because Sonia Gandhi sees this as the “game-changer” welfare policy that will endear the Congress to the rural electorate whenever general elections are held. From Pranab-da’s perspective, that leaves only the fuel and fertiliser subsidies, which are not only politically sensitive, but will again stoke inflation and cramp growth.

But having gorged at the trough of excessive spending for much of its term in office, the government must perforce go in for a Spartan diet now. And since the pain of that will be felt by industry and the people, it’s only fair that Pranab-da initiate a mature conversation with us.

He must, first, acknowledge, on behalf of the profligate government that he is a part of, that all the reckless spending that it undertook hasn’t exactly translated into votes for the Congress ( as the recent Assembly elections bore out). He must then pledge that the government won’t go back to gorging again next year on tax-and-spend excesses, ahead of the general elections, thereby undoing the efforts of the belt-tightening that he will almost certainly inflict on us in this budget.

From all accounts, Budget 2012 will in the short turn cramp private consumption and feed inflationary pressures: the rate cuts that industry is looking for could take a lot longer to come through because inflation may prove stubborn. Equity markets, riding high on liquidity, don’t appear to have budgeted for the impact of this enforced fiscal adjustment process - this bitter medicine - and could be vastly disappointed on Friday.