Union Budget 2012-13: Populism might lead to economic perils

Business

oi-Sunil

By Sunil Fernandes

Published: Thursday, March 15, 2012, 13:09 [IST]

For months now economists, rating agencies and analysts with foreign institutional investors have been screaming that India's fiscal deficit is a cause of worry. Pranab Mukherjee knows this better than anybody else, that fiscal deficit is slated to go way beyond the 4.6% level he had predicted in the Union Budget 2011-2012.

Rising subsidies including petrol, fuel and fertilizer play a big part in this fiscal deficit. Sadly though, Pranab Mukherjee has to swim with his hands tied. He cannot de-regulate disel prices or he would have Mamata erupting once again. Ditto for LPG. Petrol prices though deregulated cannot be hiked simply because it will cause political mayhem once again.

Estimates suggest that subsidies are expected to be way beyond Rs 60,000 crores as estimated in the budget of 2011-2012. In fact, some suggest that the figure could even double keeping in mind the fact that crude prices have risen sharply and also due to the rupee having depreciated even faster.

Fertilizer and food subsidies cannot be touched and ditto for agricultural income. In fact, for long economists have been suggesting taxing the rich farmers, but farming income is tax free all across the board.

Every form of taxation has become sacrosanct as populist measures remains paramount. The simple consequence of this is that the fiscal deficit will balloon and so will the current account deficit, leaving India on the brink of a 1991 like situation. Analysts with reputable rating agencies have infact threatened to downgrade India's ratings, if there is no fiscal consolidation. Every ratings downgrade means cost of funds get costlier and we increasingly become a pariah. Ask the Greeks about it, more than anybody else. Though we are very far from a situation like that, the fact remains that time is flying to urgently bite the bullet.

It's time that Pranab Mukherjee takes bold decisions. It's exactly what Dinesh Trivedi tried with the Railways and was shown the door. However, it's better to have tried and failed then never tried at all.

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