The Finance Minister, Mr Pranab Mukherjee, is a realist who recognises the inherent difficulties of getting unpopular economic reforms approved, with roadblocks put up by stubborn populist coalition partners. Reforms by stealth don't work either.

The recent political circus regarding the attempted rail fare hike (after a gap of 10 years) is proof enough. So, it isn't surprising that the Union Budget 2012 will have to work its way through consensus-building, with Mamata Banerjee's TMC, the crucial coalition partner, trying to sound ‘more Left than the Leftists' to retain power in West Bengal. And not to be outdone, there are indications that SP, BSP and JD(U) will also follow that path.

RBI AND BUDGET NUMBERS

Even the RBI, going by the Governor's post-Budget utterances, doesn't seem to have faith in the Budget numbers. RBI wants proof of tangible progress in fiscal consolidation (and not promises) before lowering the (high) policy rates necessary to stimulate investment expenditures and growth. Many economists believe that we need a tighter fiscal policy and a more lenient monetary policy in the interest of growth and inflation control.

A more lenient fiscal policy (especially more expenditure on less productive subsidies) is contributing to inflation by raising aggregate demand while crowding out government's capital expenditure (especially in agriculture and infrastructure).

Private investment has been hit, reducing the availability and cost of funds.

The RBI isn't willing to reduce rates unless it sees sustained progress on the inflation front. True, the inflation rate has come down in recent months. But the danger of rekindling the (apparently subdued) fire of inflation is real, as there is a large element of suppressed inflation in the system.

The rise in global fuel and fertiliser prices still hasn't been passed on to the consumers due to political compulsions. To the extent the FM succeeds in doing so (though that is doubtful), as promised in the Budget, cost-push inflation will get a boost. This would be in addition to the inflationary impact of the rise in excise and service taxes, and the expansion of the service tax net to cover all services except a small negative list.

The actual fiscal deficit ended up being 5.9 per cent of GDP in 2011-12, against the target of 4.6 per cent. The FM is projecting the fiscal deficit for 2012-13 at 5.1 per cent of GDP, based on a number of assumptions. His tax revenue projections are based on a GDP growth of 7.6 per cent in 2012-13.

This may look achievable, since India experienced an average growth rate of nearly 9 per cent before the global slowdown started. But there is a question mark in view of the continuing economic slowdown in the UK, USA and Japan (even China is slowing down), and even more importantly, the policy paralysis in the present government.

INVESTMENT PROJECTS

Several big investment projects aren't getting off the ground for a long period due to uncertainties relating to land acquisition and environmental issues. Chances of resolving these issues in the near future don't appear bright in the light of competitive populism of political parties, whether in the Opposition or the government.

In this context, the Budget decision to levy capital gains tax on domestic asset acquisition through mergers and acquisition deals involving overseas companies would transmit another negative signal to foreign investors.

It seems doubtful if the FM can keep his promise of capping subsidies at 2 per cent of GDP. He hasn't made any provisions for the additional food subsidy burden arising out of the proposed Food Security Bill — perhaps, hoping that it wouldn't be implemented in the current fiscal. If the tension between US, Iran and Israel flares up further, international prices of oil can go up to any level.

Be that as it may, compulsions of coalition politics won't allow him to reduce the total oil subsidy bill (including under-recoveries of oil companies and explicit subsidies) by raising the price of diesel, kerosene, LPG and fertilisers.

Even if, as promised in the Budget, he eventually succeeds in implementing direct subsidy to users of kerosene, fertilisers (and food) by using UID and bank accounts, this would take a long time to become operational.

It would be a good idea to pay direct subsidy to public transport (rail, bus and trucks) while deregulating diesel prices. This would eliminate the huge subsidy to affluent buyers of diesel cars, who aren't aam admi , by any stretch of imagination. But, contrary to expectations, the Budget hasn't imposed any additional taxes on diesel cars.

REVENUE DEFICIT

It seems that the FM himself is not confident about his fiscal consolidation exercise. He has devised a new concept, ‘effective revenue deficit', to dilute his adherence to the FRBM targets. A revenue deficit (equal to revenue expenditure minus revenue receipts) is a sign of the government meeting its day-to-day expenditure through borrowing, a recipe for disaster. According to original FRBM targets, the central government was supposed to gradually bring revenue deficit down to zero, and fiscal deficit to 3 per cent of GDP, by March 2008.

Successive finance ministers have been reducing the targets, citing some extraordinary reason or the other (like drought, global recession and the need for stimulus).

The new concept ‘effective revenue deficit' deducts all revenue account expenditures which the government classifies as ‘grants for the creation of capital assets' from the revenue deficit.

For example, massive social welfare expenditures like the expenditures on NREGA (to create rural employment for the poor), Indira Awaas Yojana (rural housing), Pradhan Mantri Gram Sadak Yojana (rural roads), Sarva Siksha Abhiyan (free primary education) etc, are to be subtracted from revenue deficit to arrive at the much-lower ‘effective revenue deficit' figure.

For example, for 2011-12, the revenue deficit figure is 4.4 per cent, while the ‘effective revenue deficit' is 2.9 per cent — a difference of 1.5 per cent. Though the 13{+t}{+h} Finance Commission didn't accept this classification, the FM has now reinterpreted the FRBM target as the elimination of the ‘effective revenue deficit' by March 2015.

Economists can see some merit in classifying these expenditures as investment expenditures, to the extent that these are creating productive physical or human capital (though questions are raised regarding the durability of some of the assets created, like rural earthen roads or dykes). But the real intent of these new nomenclatures is to fudge figures and dilute FRBM targets.

(The author is a former Professor of Economics, IIM, Calcutta.)

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