Budget likely to cater to populist pressure

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Pranab Mukherjee sits before giving the final touches to the federal budget 2011/12

Prime Minister Manmohan Singh's embattled government will likely boost spending on social programmes in a populist Budget on Monday, even as India is threatened with a potentially ballooning subsidy bill for food and fuel.

Higher spending to appease voters will make it tougher to reach deficit-cutting targets in a year that could see slower economic growth, and could also make policymakers' battle against inflation more difficult.

"Pruning the (fiscal deficit) is tricky, especially when the economy is showing signs of a slowdown, cash-guzzling social sector projects are due to be announced and high commodity prices globally are likely to bloat the subsidy bill," HDFC Bank chief economist Abheek Barua wrote in a note.

Unlike in the current fiscal year ending March 31, New Delhi will not be bailed out by unexpectedly strong growth and revenue from the sale of 3G telecom licences.

The government's political imperative not to cut subsidies will be hugely expensive. Food subsidies total nearly $13 billion, or 5 percent of the Budget, while fuel subsidies total around $5.5 billion, 68 percent more than a year ago.

Political obstacles, including from within the ruling Congress party, which is increasingly moving to the left, will also discourage any major reforms in the new financial plan, such as allowing more foreign investment in the financial services and retail sectors in Asia's third-biggest economy.

The government has become bogged down in a slew of corruption scandals, and soaring food prices have only made matters worse.

EYE ON ELECTIONS

Finance minister Pranab Mukherjee, known more as a wily political operator than as an economic reformer, is likely to have growing public unrest in mind as he crafts the new Budget.

Polls in West Bengal and Tamil Nadu will determine the strength of the ruling coalition ahead of the 2014 general election. A poor showing by Congress will bolster the opposition and weaken the party's standing with its already unruly allies.

However, increased government spending has spurred demand in India without commensurate growth in new capacity, adding to inflationary pressures.

To offset higher social spending, the budget is likely to increase excise taxes and widen the service tax base, and include expected 400 billion rupees ($8.8 billion) from the sale of state assets.

While growth in Asia's third-largest economy will reach 8.6 percent this fiscal year, and the government is gunning for double-digits, persistently high inflation — now topping 8 percent — has stirred opposition backlash and street protests.

Yashwant Sinha, a former finance minister and senior member of the opposition BJP, told Reuters Insider that India should sacrifice a bit of growth to tame inflation.