There was nothing much new in President Pratibha Patil's opening address to the new parliament. The address referred to consolidation of existing flagship programmes like rural employment guarantee and to new ones like food security and skill development.

‘Will keep us busy every day for next five years’

Overall, it is safe to assume that the first budget may defer harder options and would like to leave a 'feel good' factor in the electorate while focusing on restoration of growth and the social agenda. The President has set the tasks before the government in a medium-term setting, like a five-year plan, while treating the electoral outcome as a mandate for 'inclusive growth,' equitable development and a secular and plural India. But it was notable for its strong emphasis on "effective governance and account-able delivery of services to the people." This is where successive governments, while flaunting increased allocations for social development, failed. Prime minister Manmohan Singh says the long-term vision and the priorities listed in the President's address "will keep us busy every day of the next five years."

Restoring growth...

Restoring growth is the most urgent of tasks, as the president pointed out. This budget would thus seek to pull the economy back on the growth track. While the prime minister has repeatedly emphasised that an 8-9 per cent growth is essential for India to mobilise the required resources for sustainable social development, any hope of a higher growth beyond 6-7 per cent in the current year must be put aside.

The budget has, nevertheless, to come up with a strategy to help revive manufacturing output, exports and private investments with demand- stimulating fiscal measures and incentives. Growth had slowed to 6.7 per cent in 2008-09 from 9 per cent in the previous year and would be further down in 2009, the peak year of the global slump with all major industrialised economies in recession. As against 4 to 5 per cent projected by international institutions, RBI estimates 6 per cent GDP growth in 2009-10.

India’s industry and exports weakened in the latter half of 2008-09 and recorded the lowest growth rates in several years at 2.6 and 2.4 per cent respectively. In April, the first month of the new fiscal year, there were feeble signs of improvement in industrial production (1.4 per cent), mainly in consumer durables; the infrastructure index (six core industries) rose to 4.3 per cent, the increases confined to coal and cement and marginally steel.

Exports in April fared worse, down by 33 per cent on a year-on-year basis, while imports were more negative at 37 per cent. Whatever the trends, ‘the worst is over’ according to Dr. Suresh Tendulkar, chairman of PM's Economic Advisory Council.

Some positive signs

On the positive side, the stock market has a bullish run with high expectations of growth and a reform-oriented budget, which would spur private investments. Market sentiment was boosted by the net inflow of portfolio investments of over four billion dollars over April-May. In the year ended March 2009, net outflows of portfolio investments were around 14 billion dollars. FDI remained steady at over 30 billion dollars (gross) during the year.

Expected government moves on disinvestment and recapitalisation of banks (indicated in the President's address) have also added to a mood of subdued optimism. Investment plans and IPOs by both public and private corporate enterprises are being lined up in anticipation of the budget strengthening the investment climate and providing a stable policy framework to help the economy regain its growth momentum. In his pre-budget discussions, Mukherjee also met chiefs of public sector banks when he asked them to provide credit at reasonable rates, reflecting the steady reductions in key policy rates by RBI till the end of April.

Fiscal quandary...

The unprecedented over-run in public expenditure in 2008-09 resulting from a confluence of factors - Sixth Pay Commission, farmers' debt waiver and tax reliefs and duty reductions to help stricken sectors – reversed the fiscal consolidation process; the centre’s fiscal deficit touched 6.2 per cent. The prime minister sees the need for expanding public investment, particularly in infrastructure and, hopefully, it should create demand for materials and also generate some employment.

The 2009-10 budget would need to provide for a considerable step-up in development expenditure. Given the order of fiscal gap at around 6 per cent even in the interim budget, Mukherjee will be hard put to contain the widening gap.

The states are also demanding a relaxation in borrowing limits to cap their deficits at 4 per cent. Rationalisation of tax structure would thus become handy both to give much needed reliefs and help remove needless exemptions.

Food security, by providing 25 kg of rice at Rs.3 per kilo for below poverty line (BPL) sections, is a major electoral commitment. The FM has to prioritise the spending plans in this year of economic recovery. He has also to accommodate demands on the budget from various ministries such as textiles, commerce and industry and civil aviation (with Air India in financial distress), all designed to lift the economy from a downturn.

There are now too many welfare schemes besides flagship programmes all of which would require some linkages and consolidation to secure greater efficiency in allocation and outturn. This could be taken up in the next year. NREGA itself needs some transformation into a national programme to create durable assets, especially infrastructure, in the countryside.

Still on slippery ground...

Food prices in the country had been persistently high, totally at variance with the annual rate of inflation which has remained for weeks at below one per cent and turned negative by mid-June. The more dependable consumer price index held firm at above 8 per cent. Any inflationary upsurge, as seems likely in the latter part of the fiscal year would impair growth prospects. So we are still on slippery ground.