Apart from the signs of a growth deceleration in the domestic economy, India, with all its strong fundamentals and resilience, cannot regard itself immune to the continuing instability in global financial markets and the steep rise in prices of oil, food and metals.
The world economic scene is no longer as benign as it was in recent years, which saw many countries moving to a higher growth path in conditions of low interest rates and low inflation. These conditions were as much favourable to emerging economies as the world as a whole. In mid-2007, the scenario changed dramatically after financial market turmoils.
Finance Minister P Chidambaram has thus to formulate a Budget strategy which not only helps to keep India secure on a robust growth path, notwithstanding the signs of moderation in industry and services at home, but also ensure that emerging inflationary pressures are well contained.
While India's overall outlook is positive for macro-economic stability, 2008-09 is expected to be a year of relative growth slowdown, mostly from the spillover effects of the weakening of the global economic momentum and volatile financial markets.
The United States, global growth engine, is moving into recessionary conditions and this would affect trade and capital flows for developing countries, which could see a drop in American demand for their exports and services.
After two successive years of GDP rising by 9.4 and 9.6 per cent, India's growth is set to slowdown to 8.75 per cent in 2007-08, according to IMF, and further moderate to 8.25 per cent in 2008-09. The Central Statistical Organisation (CSO) which provisionally estimated growth to have gone up to 9.6 per cent in 2006-07, has also lowered the advance estimate for 2007-08 to 8.7 per cent, similar to the IMF projection.
The downward revision is mainly attributed to agriculture growth weakening to 2.6 per cent in 2007-08 from the previous year's 3.8 per cent and the deceleration trends in the manufacturing sector. At the same time, the annual rate of inflation, which declined from around 6 per cent at the end of March 2007 to 3.5 per cent at the start of New Year, had crossed the 4 per cent benchmark to register 4.11 per cent by the end of January.
Popular Expectations
Demands for a populist Budget are focused on raising incomes for farmers, basic services and other benefits for poorer sections and providing jobs and skills training for youth. Both the Prime Minister Manmohan Singh and the finance minister have spoken of the urgency of providing significant relief to indebted farmers and on measures to boost agriculture and raise rural incomes.
Equally, they have emphasised the importance of education and skills for the growing numbers of youth in the country. All of this should find reflected in the forthcoming Budget.
While aiming at growth of about 9 per cent with control over prices, Chidambaram cannot ignore the pressures for a people-friendly Budget, which would appeal to the people as one meeting their aspirations for a better life.
Besides debt waiver and other relief measures for farmers, the Budget is expected to embody several new initiatives already taken by government in the matter of old age pension and social security for unorganised workers. The rural employment guarantee programme is now countrywide and what is required is its effective, accountable, implementation.
A growth of the order of not less than 9 per cent would certainly generate more resources for raising public investments in infrastructure and the allocations for all social development programmes designed to spread the benefits of growth. Fiscal policy has also to be geared to holding the price level. "We will not lift the vigil on prices" Chidambaram has said, and the strategy would be to balance growth and inflation.
In view of price pressures in the economy, the Reserve Bank has kept interest rates unchanged for the present. The Prime Minister's Economic Advisory Council headed by C Rangarajan, while revising the growth estimate for the current year from 9 to 8.9 per cent and projecting 8.5 per cent in 2008-09, points out managing inflation will be a major challenge in the coming year.
Inclusive Growth
Since agriculture holds the key to food self-sufficiency, rural incomes and relative stability in prices, the Budget package for farmers is expected to provide for waiver of debt for smaller farmers, a moratorium on interest payments, lowering of farm credit rates and a range of measures to improve farm productivity.
The Finance Minister has emphasized the importance of 4 per cent growth in agriculture for sustained GDP growth at 9 to 10 per cent per annum. The Budget will address agriculture and the well being of rural population with a significant step-up in allocations for agriculture-related activities and for health, education and other rural infrastructure services. Both agriculture and education are likely to get strong impetus from the Budget.
Government's success so far in fiscal consolidation, helped by the revenue buoyancy, of the last two years, has enabled it to make enhanced allocations for social sectors. The revenue and fiscal deficit targets in 2007-08 Budget (1.5 and 3.3 per cent of GDP) would be met, according to the finance minister.
While mobilization of additional resources has become imperative, the finance ministry exudes confidence of meeting higher plan expenditure in 2008-09, second year of the 11th plan, on the basis of the buoyant trends in revenue receipts which recorded over 40 per cent growth in 2007-08. The Finance Minister is also expected to adhere to the fiscal consolidation process in the coming year.
Tax Policies
As one, who believes in moderation and stability of tax structure when there is satisfactory compliance, the Finance Minister is generally expected to maintain the rate structure of personal income tax. But suggestions have been made, including by the Economic Advisory Council, for adjustments in income slabs to afford some relief to those in lower and middle income groups.
The Finance Minister is on record with indications of relief to sectors 'stressed' by the rupee appreciation affecting their export competitiveness and a boost to labour-intensive manufacturing segments. In the main, the Budget is expected to be largely farmer -- and people -- friendly, given the government's commitment for an agricultural revival and rural prosperity.
In the run-up to the Budget, expectations have also been raised of cuts or adjustments in the customs and excise duty structure to make essential imports like crude oil cheaper as also other inputs for exports with a two-fold objective of moderating the price level and restoring the vibrancy of the manufacturing sector which has already been reaching out to the world.
Here again, the EAC has suggested selective cuts to give a boost for consumer goods whose output had been declining over the latter half of 2007. In addition, Chidambaram has also hinted at fiscal measures to offset the impact of adverse external developments on the Indian economy, as circumstances warrant.
