The first 100 days of the new government would see a blue-print of fiscal and other initiatives designed to (a) lift the slowing economy by stimulating domestic demand and investment and (b) to advance the social agenda which paid dividends for the party. Hopefully, this will be the thrust of the first Budget of this government expected in July.

Prime Minister Dr Manmohan Singh has read the signs of rising expectations of the people for a better life, especially in semi-urban and rural areas, where growth does not trickle down. He is now more confident than in his first five-year term on providing a more “responsive and efficient government” besides reviving the economy and creating jobs. He needs a Cabinet that works cohesively and remains result-oriented.

In a wider sense, the reforms on the anvil would help improve investment, re-vitalise agriculture and accelerate the pace of industrial development. But India is yet to master a growth pattern, which rightly balances efficiency and equity. However laudable flagship programmes like the national rural employment guarantee and Bharat Nirman, to build rural infrastructure, achievements are still far below in relation to vast amounts of expenditure made. Nor services are delivered effectively. This will be one of the focus areas for the new government.

India Inc. was the first to hail the return of stability at the Centre and has since flooded the media with its own higher expectations on the forthcoming budget. Conventionally, the bureaucracy gets to work, taking those as inputs, to provide the options for decision-makers. Indeed these become the core of the fiscal strategy, pushing social equity to the periphery. Will the new Budget mark a refreshing change?

Multiplicity of objectives…
There are far too many, some conflicting, demands on government and the prime minister himself has laid out a multiplicity of objectives even if possibly he views them in a medium-term perspective. Expanding the fiscal stimulus and controlling fiscal deficit do not go together. More liberalisation without getting jobs generated for the educated, skilled or unskilled, does not make a rational case for reforms, even if industry now gets ‘green signal’ for them.

Both the government and industry favour early push for the financial sector – banking, insurance and pension sectors – reforms embodied in the earlier legislation which could not be adopted in the face of Left resistance – . More than that, industry has called for improving the investment climate with tax, duty and interest rate cuts. So, in the midst of all expectations and pressures, the prime minister and the finance minister have to set priorities for the forthcoming budget.

Faced with the enormous challenge of returning to a sustainable fiscal balance in the foreseeable future, one immediate option to offset at least a part of the additional outgoes needed for social sector programmes is to go back to disinvestment, selectively but on a significant scale without diluting government’s majority holding (51 per cent).The other area is to let well-performing public enterprises raise sizable amounts of debt in the market for capacity expansions, especially in infrastructure, to accelerate the pace of development. IPOs or debt issues, however, depend on the equity market conditions which are again a reflection of global market sentiments.

There is need for a greater role for bank financing for both productive sectors, large and small and for project-oriented term loans. The massive borrowings of government, especially since 2008-09 and projected at over Rs.330,000 crore in the interim budget for the current year, would limit the ability of banks to finance freely and also have the effect of crowding out private investment. In an attempt to reverse the investment slowdown, government and RBI acting together would try to bring about a reduction in lending rates. Business confidence has not been high since the later half of 2008-09. Recently, some sectors (like automobiles) exhibit signs of recovery. Industry may need a pick-up in demand, domestic and external. This has to do with both fiscal stimulus and pattern of growth.

Growth and stimulus

Indian economy is currently growing at a 5 to 6 per cent rate of growth. At any rate in the first half of fiscal 2010, few signs of output or export revival are expected. There would thus be a fall in the growth of revenues while reserves have ceased to grow since last year. Government economists talk of a recovery in the second half with growth hitting 7 per cent, but it is linked to global recovery in recession-hit developed countries, which caused the universal slowdown in growth. Governments and central banks of those recession-hit countries, taking a more realistic view of their prospects, rule out firm signs of recovery in 2009 and expect growth to be zero or marginal.

Thus, the negative impact on capital flows and exports for emerging economies and developing countries would not reverse itself in 2009, at any rate, according to assessments of FIIs and UNCTAD. Therefore, it would be optimistic to assume that India would emerge out of the slowdown first and begin to gain growth momentum in the current year. This must be factored in the planned stimulus measures in the budget.

International institutions which urged developing countries to integrate with the world economy, are now advising them to rebalance their growth strategy by focussing more on domestic demand with necessary policy reforms. Even if exports are not as critical to growth in India as in other countries, drying up of the export markets has hit the labour-intensive manufactures. Globally, the solution is to continue with stimulus for 2010 as well. The additional stimulus measures would, therefore, have to take care of saving and creating jobs. India’s present fiscal position, no doubt, severely limits the scope of ameliorative measures but as even financial pundits acknowledge, recovery should take precedence over setting the fiscal house in order, which is becoming a long-term goal.

Budget strategy…

It is time India brings out the full impact of all its liabilities on the budget document to give a true measure of the revenue and fiscal deficits. Pending the receipt of the Kelkar Task Force report, the Budget may not outline a new framework for deficit reduction targets. The time is not opportune even for the planned introduction of the Goods and Services Tax.

A suggestion for raising the tax exemption limit to Rs. 1.75 to 2 lakh has been proposed as part of stimulus measures. With the fiscal deficit at six per cent of GDP, it is unthinkable for government to reduce tax revenues, especially during an economic slowdown. Those in income groups above Rs.1.5 lakh are not in such dire need of relief as the more badly affected lower income groups and the poor who could benefit from a scheme of cash transfers but it may not be easily workable on a national scale. While there is so much impatience to get back to nine per cent growth - which may be years away now - there is no similar urgency in evidence for a well-organised social security system in India.

The budget may include some further rationalisation of taxes and duties to assist the affected sectors, manufacturing and services. Additional revenue mobilisation through the budget would be deferred until the economy resumes sustainable growth. 2009-10 is a year of transition for the economy and the budget has to include some of the poll promises of the Congress Party, one of which is to provide 25 kg of rice or wheat at Rs. 3 per kg for BPL families. The Interim Budget had in fact reduced the provision for subsidies in the estimates for this year. Even its revenue projections may not be realised as GDP growth is assumed at over seven per cent.

Apart from disinvestment, another option to reduce government liability is to introduce the oil pricing mechanism in a way that government’s extra-budgetary burden gets reduced and marketing companies have freedom to adjust prices according to movements in international prices within certain limits keeping in view consumers’ interests. This would ensure that oil companies are able to bring down their losses, a good part of which is currently borne by government by way of Oil Bonds.

Major emphasis in the budget will be on expanded social sector programmes and making them more effective so that the early gains from programmes like rural employment guarantee are not frittered away. A similar focus will be on infrastructure which would call for more public expenditure without waiting too long for private participation. At the same time, power sector would be given special attention to attract private capital through changes in current procedures to expedite project implementation and achievement of targets including extension of electricity to more villages. The World Bank and ADB have indicated larger commitments they are willing to make for India’s infrastructure over a three-year period. This needs to be availed of for reducing infrastructure bottlenecks to sustainable growth.