In the run-up to Budget 2011, people had drawn parallels between Manmohan Singh's budget of 1991 and Pranab Mukherjee. Then you had a politician prime minister and a technocrat finance minister. Now the same technocrat had become prime minister, while one of the countrys most respected politicians is the FM. In 1991, the country faced a crisis of confidence; in 2011 we face a crisis of growth. Most people believed that the FM might perhaps adopt the same big bang approach Manmohan Singh had done, but the FM seems to have preferred a more gradualist approach. The economy is faced with five key challenges fiscal consolidation, tax reforms, financial sector reforms, infrastructure development and action on corruption. The Budget speech has shown progress on all of them. Take fiscal consolidation. The fiscal deficit, as well as net market borrowing numbers, are surprisingly low. The FM hopes to peg the deficit in FY12 at 4.6% of GDP and has budgeted for net borrowings of about R3,40,000 crore. At first glance, both estimates seem over-optimistic. But read between the lines, and perhaps what he is signaling is that at some point, maybe after the state elections, he would look at doing away with administered pricing for diesel and kerosene. That would definitely reduce the subsidy burden.While the announcement about enhanced FDI is absent, the FM has announced two other significant initiatives.
First is allowing FDI in domestic MFs and that the RBI will be announcing final guidelines for new private sector banks. He has re-affirmed the government commitment to taxation reforms, especially on DTC and GST. On the infrastructure front, by enhancing FII limit on investment into infrastructure bonds to $20 billion, the FM has tackled a critical ailment afflicting the sector. Now all that is needed is for the government to kickstart the investment process. On the corruption front, formation of a GoM will force the government to act more forcefully. On the taxation front, the FM hasnt tinkered much, though reduction of surcharge on corporate incomes and raising of basic tax slab to R1,80,000 are welcome. On the indirect taxes, the market has actually heaved a sigh of relief, not because of what the FM has done, but what he hasnt done. Widely expected duties on diesel cars, cigarettes, power generating equipment werent imposed. The FMs approach will ensure that the economy continues to be on the 8-9% growth path. Where he perhaps missed was not pushing the reforms agenda enough, which could propel the economy on a 12-13% growth orbit.