Having endorsed the agricultural strategy of the Union Budget and asked for its implementation to be put on the fast track in my Express column, one can try and guess what an ideal Budget debate should cover. The literature review, with which the Economic Survey has justified some inflation with growth, is enjoyable; for, at heart, I remain a teacher. The Chief Economic Advisor (CEA) brings in a lot of analysis from the world, which is good, but I wish somebody had brought to his attention Indian studies, too, for they may have hinted at out-of-the-box solutions. In the early phases of liberalisation, the late Manohar Rao used control theory to study the trade-offs between growth and inflation in the Bombay School. Of course, his macroeconomics text was popular all over, as I discovered in a visit to Washington. The tradition has continued at RBI and, in the last avatar I saw, in a book edited by BB Bhattacharya, growing beyond 7.5% created many problems. Of course, in standard Klein-Kosobud growth econometrics, an Alagh-Guha paper had worked out the trade-off at around 7.5%. Actually, Kaushik Basu?s excellent discussion on trust in a contemporary behavioural economics frame could be pushed for many of the answers. Edmund Phelps got the Nobel for showing that when you reach that frontier, which any economist worth his salt can feel?when prices are in stress?the relationship between sarkar, business and trade unions becomes the main issue. Incidentally, all is not lost, for when the trust deficit was showing up in Delhi, a young collector was being saved by his adivasi customers on the border of Orissa and Andhra. All of a sudden, I felt that a year and a half in designing fresh recruitment and training styles for the higher civil services a decade ago was not all lost. The Budget speech forecast of an expected growth ?at 9% with an outside band of +/-0.25%? was delightfully precise, but without an estimate of the significance of the deviation.

Regarding food prices, the Budget speech uses a delightful phrase, ?negative rates of inflation?. A double-negative is a product of our mindset. Falling prices are less ornamental. This was used by the late C Subramaniam, as finance minister, during the Emergency. He was then taking credit for India being one of the first countries in the world to come out of the energy crisis. To suggest that the macro situation is similar today, is pushing credibility; but the more serious issue is a rather weak macro-policy framework for fighting food inflation. Agricultural growth of 5.4% comes after a low base. The average of the last three years is less than 2%, which means that 0.5% of GDP is weather related. Food and fuel inflation is above 15%. Corporate results in the third quarter show rising cost impacts on falling profits before tax. Manufacturing growth is half of what was in the first half. Interest rates are high, at around 10%. Does this mean growth is slowing down? Not exactly. It?s still at around 8%. But, as the PM said, and as we have also said, inflation, if ignored, is a threat to the growth rate.

The current growth-inflation dynamics in the last few weeks suggest that the balance of risk has tilted towards intensification of inflation. The January 2011 figure was 8.23%. Largely led by food and fuel, it is now spreading to more general inflation, with manufacturing prices edging upwards on account of cost-push factors. The current account deficit is a matter of concern in the year ahead. There are mitigating factors, however. The Budget speech correctly says that revenue growth is higher, with the revenue from 3G spectrum sales, for example, providing a boost. But it can be argued that since headline inflation has been higher than projected at the time of Budget formation, growth of revenues in nominal terms is higher than the projected 12.5%, since inflation at 8% and real growth at 8% gives 16% growth. High food and fuel prices can cause macro pressures through food, fertiliser and fuel subsidies and direct government expenditures. Salary bills could be higher with the inflation. These are matters of concern. On the other hand, it is true, and I am the first one to admit it, that India?s fiscal managers like the finance minister and his team are experienced men in handling such pressures. The PM, for example, highlighted inflation as a threat to growth even when the CEA underplayed it. Incidentally, fuel prices and a bad monsoon or political profligacy in an election year could make matters worse, just as prudent management of the kind the finance secretary suggested could improve matters.

An interesting aspect of food inflation fighting has been the design of tariffs to control exports. This was tucked away, but is better than export bans. A friend to whom I said this told me that we may in fact have both because the bureaucracy is not above overkill in instruments. But leaving that aside, I do hope we will use tariffs to regulate food imports also. It is clear as daylight that we do not have a policy on stable and reasonable incentives for non-grain crops entering the food basket. It is clear and has been proved again by a chela of the late Manohar Rao that non-foodgrain supplies are price-elastic and this is the only way of ensuring supplies. But, we rejected the advice of many committees that worked out the design and stuck to a completely anti-reform stance. The Economic Survey makes the point but it is lost in the cacophony.

The author is a former Union minister