Analysis news

In theory, the budget could allow Finance Minister Pranab Mukherjee to cut a record $97 billion government borrowing, and streamline taxes and push sales of state firms and a 3G mobile phone licence auction to bring in billions of dollars. Instead, the 74-year-old Congress party stalwart may ignore all that and produce a simple statement of accounts on February 26. It would send a signal Congress increasingly broadcasts in its second term — don’t rock the boat. It underlines that while Prime Minister Manmohan Singh preaches reforms, pressure from Congress rank and file to focus on social programmes combined with Mukherjee’s own reputation as a safe, if uninspiring, pair of hands may overshadow any vision.

“This is a government that really does not have a mission,” said D H Pai Panandikar, head of the private think-tank RPG Foundation. “It is reactive. Don’t expect vision in the budget.” But one senior government official cautioned that the budget speech was not yet written, and there were some signs of pressure for the finance minister to present a more reform-driven budget. “People are trying to persuade him (Mukherjee) to go beyond an AFS (annual financial statement),” the official said.

Social spending
The budget could push new social programmes such as offering subsidised wheat and rice to the poor. Another programme, the rural employment guarantee scheme that provides jobs for millions of villagers, costs India about one per cent of GDP. With little will to cut spending, government borrowing may remain at a record Rs 4.51 trillion ($97 billion) and possibly put further pressure on interest rates. The government debt-to-GDP ratio is just under 80 per cent, almost double the norm for emerging Asian markets.

“Clearly there is a concern in the market over the political constraints,” said Vineet Malik, head of interest rates at HSBC India. It should not have been like this. In Congress’s first term, the communist parties it relied on for parliamentary support were blamed for the government’s slow progress in liberalising Asia’s third-largest economy. Since its election win, those communist shackles have disappeared.

But Congress, which oversaw a heavily state-run economy for decades after independence in 1947, now seems prisoner to its leftist roots despite flirtation with reform under Singh. The government’s first deficit-laden interim budget in July, just after its election victory, disappointed many investors with a 36 per cent spending hike funded by record borrowing. With the opposition organising protests in numerous states against food inflation at an 11-year-high, the federal government is under pressure from Congress party stalwarts to tone down hikes in state-regulated fuel and food prices.

“The budget will signal how Mukherjee balances the economic needs of the government with the political agenda of Congress,” said Delhi-based political analyst Mahesh Rangarajan. The government’s recent decision to delay the launch of its first genetically modified (GM) vegetable was also criticised as pandering to its farmer voter base rather than science. “The problem was never the communists. The problem was within Congress itself,” said Jahangir Aziz, a JP Morgan economist in Mumbai. “There is no real consensus within the party on these issues.”