EXPECTATIONS FROM BUDGET-2011

The last session of the parliament was paralyzed by the demand of JPC by opposition. Since the government has given some positive signals regarding the JPC probe, it can be expected that the upcoming budget session will run smoothly and crucial issues which are being faced by Indian economy will be addressed.
The performance of Indian economy in the post recession period has given us a chance to be upbeat about its future prospect. Last week the Central Statistical Organization (CSO) predicted that the GDP’s growth rate for the fiscal year 2010-11 will be 8.6 %. In such a scenario it can be the case that a sense of complacency creeps in our mindset and we tend to ignore the possible challenges and the risk which our economy may face in coming years. This budget is a perfect opportunity to look into such challenges and devise the way to deal with them in the future.
Challenges for Indian Economy:
Inflation:
A food inflation of 11 % and general inflation of 8.5% implies that all is not well for our economy. Even in the best case scenario the inflation can not be expected to go down below 7% by the end of this financial year. This figure is well above the comfort zone of 4-5 %. The disturbing events in West Asia mean that global oil prices can rise in coming days.
These unfavorable events may force the RBI to raise the interest rate up to the level that it may negatively affect the investment prospects. In the worst case scenario the government may have to trade off between the inflation and the growth rate.
Dwindling FDI:
The current account deficit of India is 3.5 to 4 %. In the last quarter the FDI inflow has gone down by 31% in 2010 if we compare it to the same period in 2009. To ignore this issue by referring to it as a global phenomenon will be a fallacy because in the same period other emerging economies like Brazil and China have seen an increase in FDI inflow of 16% and 6 % respectively. These trends are a clear sign that foreign investors are loosing confidence in Indian economy and our current account deficit is being funded by hot money which makes our economy more vulnerable on the external front.
Corruption ,Scams Et Al:
The ever increasing corruption cases and scams have dented India’s image globally. The astronomical figures of money in 2 g scam and Commonwealth games scam make Bofors figures appears to be peanuts in front of the public. The public perception of the Prime minister and the government is all time low. Since in the coming fiscal year 5 states will be having elections hence it becomes imperative on the part of the government to go for a massive image building exercise. The poor governance image will also take a toll on the foreign investment.

Seeing the risks being faced by the Indian economy it will be too early for the policymakers to be complacent about the functioning of the economy because a small internal or external shock, such as domestic political instability or a hike in the global price of crude oil can land the economy in a soup.
Therefore, it is essential that this Budget demonstrates the government's commitment to making the economy more resilient by restoring macro-economic stability. The most important step in this direction would be to rein in the fiscal deficit which at about 5.8 per cent is well above the FRBM ceiling.
Expectations from the budget:
Reduction in fiscal deficit:
In the past the Finance Ministry has used the tax receipts to fund subsidies and other social security schemes. It is a high time that the ministry uses these buoyant tax receipts to restore fiscal discipline and to wipe out the revenue deficit. This will increase the investor’s confidence and will be beneficial for the economy in the longer run.
FDI in multi brand retail:
A Budget announcement liberalizing the entry of FDI in multi-brand retail will be a much needed boost to the declining investment figures. Multinationals will not only bring investment but will also bring requisite expertise and technique in fields like SCM and procurement. This would ease massive supply bottlenecks that have contributed to keeping inflation stubbornly high in recent months. In India 30 to 40% of post-harvest produce goes to waste which amount to Rs.1 trillion annually. Foreign investment will improve logistics such as Cold Chain and back end infrastructure which can cut down this loss to the half. A much organized retail sector which currently is around only 5% will also improve tax receipts. Farmers will also be benefitted because they will be directly selling their products to big firms, eliminating the middleman.
Increased spending on infrastructure:
The role of good infrastructure in attracting foreign investment is needed not to be discussed. In this budge the Finance minister should announce policies for infrastructure building on ppp model so that a sustainable model of long term development can be developed. It will not only bring efficiency in the infrastructure development by the involvement of private sector but also reduce the burden from the government so that it can focus on the core governance issue.


Jayant Yadav
MBA(IB)-2010-12
IIFT Delhi