[Only a year ago, Pranab
Mukherjee, then finance minister, unveiled a budget now regarded by many
analysts as a major mistake. Desperate to increase revenues, the government
gave broad latitude to tax collectors to pursue multinational companies for
billions of dollars in new, unexpected taxes. Investment slowed markedly while
investors and political opponents complained that the coalition government, led
by the Indian National Congress party, was endangering one of the world’s
fastest-growing economies.]
By Jim Yardley
NEW DELHI —
Not too long ago, when India’s economy was
roaring amid predictions that the country would enjoy high growth rates for
years to come, the finance minister could have been forgiven for strutting
during budget week. He got to march into Parliament carrying a ceremonial
briefcase bearing the budget as if he were Santa with a fat bag of goodies.
But on Thursday, when
the finance minister, Palaniappan Chidambaram, arrives in Parliament, the
briefcase will no doubt feel heavy, just as the mood will be very different.
Faced with slowing growth, persistent inflation and sagging investor confidence,
the Indian government is pinned between conflicting pressures. Economists warn
that tough steps are needed to avoid long-term fiscal problems, even with
political leaders leery of introducing unpopular measures before important
elections this year.
For its part, the
government sought Wednesday to change the pessimistic narrative, as the Finance
Ministry released its annual economic survey and projected that economic growth
would jump somewhere above 6 percent during the next fiscal year, which begins
in April. It predicted that the downturn was “more or less over and the economy
is looking up.” Some economists were skeptical, as similar rosy predictions in
recent budgets have proved wrong.
“Let me remind you that
last year the economic survey spoke of about 7.6 percent projected growth — and
what we had was 5 percent growth,” said Ajay Bodke, head of investment strategy
and advisory at Prabhudas Lilladher, a Mumbai brokerage firm. “That is not just
a miss but a humongous miss.”
The consequences of the budget
plans are especially high because India, once a darling of global investors and
an anointed power-in-waiting, is struggling to regain its lost luster.
India’s estimated growth
rate for the current fiscal year is 5 percent, compared with 8 percent in 2010.
Ratings agencies have threatened to downgrade the country’s investment rating
to junk status, or below investment grade. Meanwhile, India’s political class
has spent more than three years enmeshed in scandals, and a bickering
Parliament has accomplished almost nothing.
“It’s a supercritical
moment, actually,” said Rajiv Kumar, an economist with the Center for Policy
Research, a research organization in New Delhi. “If you get it right, and this
is a budget that can shore up the government’s credibility, they can turn it
around.”
For investors and
business leaders, the question is whether the government will make tough calls
to address the country’s large fiscal and account deficits, curb huge subsidies
for diesel fuel and other petroleum products, unclog bureaucratic bottlenecks
on stalled manufacturing, energy and infrastructure projects and create
incentives to entice new investment.
Only a year ago, Pranab
Mukherjee, then finance minister, unveiled a budget now regarded by many
analysts as a major mistake. Desperate to increase revenues, the government
gave broad latitude to tax collectors to pursue multinational companies for
billions of dollars in new, unexpected taxes. Investment slowed markedly while
investors and political opponents complained that the coalition government, led
by the Indian National Congress party, was endangering one of the world’s
fastest-growing economies.
“The economy is in a
deep crisis at the moment,” said Yashwant Sinha, a former finance minister with
the opposition Bharatiya Janata Party, “and I only hope the crisis doesn’t
become any deeper with more pre-election sops.”
Mr. Sinha and many
independent economists warn that the economy cannot afford a repeat of 2008,
when the government was preparing for national elections the following year.
Then, the pre-election budget was filled with big spending measures, including
pay raises for government workers and the forgiveness of billions of dollars in
loans to farmers. The government was easily re-elected in 2009, but the new spending
contributed to a fiscal deficit that rose to about 6 percent of gross domestic
product, from about 2 percent the previous year.
Now, the Congress party
is preparing for critical state elections this year while also positioning
itself for the national races in 2014, when Parliament and control of the
government will be up for grabs. Some economists argue that a tough budget this
week could restore confidence and bring economic growth by the end of this
year, providing the government with a political lift in 2014.
Yet there is also
speculation in political circles that the Congress party may call early
elections, as soon as this year, and would want to curry votes with a budget
laced with more spending.
Meanwhile, many social
advocates cite the gross inequality in Indian society — which has hundreds of
millions of people still living on $2 a day or less — and are pushing to expand
the safety net. In particular, Congress party leaders, including the party
president, Sonia Gandhi, have endorsed plans for the National Food Security
Bill, which would expand the number of people eligible for government food
subsidies, at a huge cost.
Advocates say the
government is morally responsible for expanding food subsidies in a country
with widespread child malnutrition; some note that other subsidies on diesel
and gasoline can be reduced to offset the costs. But many analysts say the
government must clearly demarcate how the measure would be paid for or risk
even deeper damage to the country’s shaky fiscal situation.
“This year’s budget will
be especially important for convincing investors that India’s fiscal position
is back on a sustainable track and that populist policies won’t overwhelm the
pressing need to bring down the fiscal deficit and put public debt on a downward
trajectory,” Eswar Prasad, an economist at Cornell University in New York State
and an adviser to the Indian foreign minister, said in an e-mail.
Prime Minister Manmohan Singh, considered
a father of the 1990s market overhauls that led to a two-decade economic boom,
recently warned of “formidable challenges” facing the country. The current
finance minister, Mr. Chidambaram, known as a tough-minded political
troubleshooter, has instituted a five-year plan to trim the deficit and was
credited with pushing through measures last year that reduced fuel subsidies
and opened the retail and aviation sectors to more foreign direct investment.
But if these steps
buoyed the spirits of the business community, they have not yet revived
economic growth. In the report Wednesday, the Finance Ministry predicted that
the growth rate would improve to between 6.1 percent and 6.7 percent in the
next fiscal year. Many independent economists, meanwhile, have been far less
optimistic, projecting growth somewhere between 5 percent and 5.5 percent.
It is also unclear
whether the government will meet its goal of reducing the fiscal deficit in the
current fiscal year to 5.3 percent of G.D.P.
Neha Thirani Bagri
contributed reporting from Mumbai.