Source: Economic Times


The government needs to address the ballooning deficit in the coming Budget. But it won't be able to address it adequately enough, as it is suffering from a much deeper deficit: that of conviction in market-oriented policies and actions that improve economic freedom and consumer choice.


With the January account estimates already showing fiscal deficit at 105% of its target, much more stringent action is needed from the government. However, with the deficit now set to be close to 6% of GDP, how much can the government tighten next year, especially when the economy is slowing down?


Growth will be nowhere close to the 9% that we should have been aiming for. As we have said before, 7.5% is the upper bound on what the government can expect given its own inabilities.


On the expenditure front, unfortunately, we have been caught in a bind. The main culprits for the overshooting of expenses have been fuel, food and fertilisers - expenditure on the former that was budgeted at 2.9% of total expenditure has already moved up to take up a much larger share: 6.6% of expenditure.


By the end of January, the other two had already gone up to 124% and 111% of total Budget estimates. The so-called deregulation of petrol prices has proved to be a farce, the only measure that can be expected if any is a tax on diesel cars, which won't do much to reduce the subsidy bill as crude rises.


At some point, growth in fuel, fertiliser and food subsidies will have to be arrested. At some point, laws that force businesses to remain in the unorganised domain will have to be eliminated. At some point, leakages will need to be stopped. But apart from Nilekani's UID, there is no semblance of vision or action. In other words, don't expect too much, and happiness will reign.


As we had warned last April, high rates during the last year would hurt growth much more than earlier years, because the external situation was fraught with volatility and uncertainty. This is precisely what happened, and with hardly any clear policy action from the government on changing the supply side of the equation, the economy has had a double whammy.


To take just one example, two factors responsible for the fall in steel output in January are the mining ban on iron ore in Karnataka and Goa and power shortages. Both these are an outcome of poor planning and fuzzy governance. Yet, given the track record of this government so far, is there any point in expecting anything radically different this year?


What can make a turnaround is that rates are on their way down now; the RBI has made it amply clear that the government has to do its bit. The only question is the quantum of cuts. Yet, inflation is nowhere close to under control, and this will make for more conservative downward cycle ahead.


While the WPI will now only be released monthly, our real-time Indicus Inflation Monitor for primary food items shows us that in February, apart from the two groups we had flagged earlier - oilseeds, and fruit and vegetables - fibre prices are heating up. Also in January, the FAO Global Food Price Index showed its first rise since July.


On March 1, commodity prices rose to their highest since last May as Chinese manufacturing picked up and crude - of course, sensitive to global political conditions - will remain on the uptrend this year. The least we can expect from the government is an explicit recognition of high crude prices - this cannot be wished away, and the sooner we face the reality, the better.


Given the state that the economy and the policymakers are in right now, for the year ahead, we can expect a 7% growth, a reduction in rates by 100 bps and an average of 7% inflation. Accept this as the new baseline.