Focus on expenditure to fight slowdown, election?
The government stuck to the conventions in presenting an Interim Budget shorn of customary tax measures and announcements of new flagship schemes. This belied the industry wishlist of all round tax reductions and sector specific concessions. However, within the constraints placed by the propriety of an Interim Budget, there were a few takeaways, including clarity on the fiscal position of the government.
The pervasiveness of the global crisis has increased the acceptability of fiscal slippage already underway in India as a result of large- scale election year bounties. The swing of international opinion for use of large fiscal stimulus to fight recession (with IMF chief economist Olivier Blanchard endorsing a fiscal boost of 2 per cent of global GDP to fight the crisis) has contributed towards a decisive deferment of fiscal consolidation goals and made the (unlikely) rating downgrade of international agencies a worthwhile risk to take.
The continued focus on the expenditure side in the Interim Budget, is therefore as much a reflection of this new found acceptability of fiscal policy as it is of the impropriety of announcing further tax cuts and populist schemes in the Interim Budget. Furthermore, it reflects a political judgment to favour the relative insulation of certain sectors (e.g., rural economy) from the impact of the slowdown.
That such a strategy is associated with larger political payoffs brings a rather opportune moment to align good economics with good politics. The government has also reiterated its resolve to focus on the implementation aspects of the cumulative measures already announced by it.
While the government hasn’t lost any extraordinary tools to fight extraordinary circumstances (e.g., through ordinance), the reluctance of both fiscal and monetary authorities to deliver fireworks on pre-specified dates signifies a shift of stance towards absorption of policy measures and a keenness to save some policy headroom for the future. The financial markets, meanwhile, will largely have to muddle its way out of turbulent times. The RBI stands ready to cushion any adverse developments, especially ensuring smooth sailing of the government’s huge market borrowing programme, a corollary of the derailment of the fiscal targets. So over to the RBI now.
The writer is country economist, Noble Group
By Dipankar Mitra
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