Last chance for prudence

The only two Gs that matter today are growth and governance. On February 7, the Central Statistical Organisation released its estimate of 5 per cent GDP growth in 2012-13 — the lowest in a decade. This came as a shocker for eternal optimists. About a week earlier, a prescient RBI governor, Duvvuri Subbarao, had finally leaned on the side of growth, cutting the key policy rate by 25 basis points, even though there had been no significant respite from consumer price inflation. He took great risks in doing so, and he must expect Finance Minister P. Chidambaram to guard the budget deficit. While it is anticipated that the finance minister will do everything possible tomorrow to rev up growth, improving governance, we all reckon, is a much more onerous task. This will remain a work-in-progress for a long time. When Chidambaram rises to present his budget, the stock markets will be scanning for measures that boost growth, and economic pundits for moves to improve governance, even if the budget is just about fiscal governance. I will focus on three key assumptions that Chidambaram makes and one particular action that he takes in the budget. These will determine if the finance minister is rooted in reality as he takes measures to boost the economy.

The first assumption is to do with the nominal GDP growth rate for 2013-14. Every finance minister is tempted to be ambitious about this estimate, since a higher nominal growth rate is all that it takes for him to project a robust estimate of revenue collection. This, in turn, helps in presenting a rosy picture of the fiscal deficit — the difference between total receipts and total expenditure of the government. The deficit for the current financial year is estimated at 5.3 per cent of the GDP. Chidambaram has kept the expenditure on a tight leash so far. So he will rein in the deficit and keep it below the estimate. But next year is an election year. A nominal growth rate of over 13-14 per cent will raise eyebrows. A real growth rate of 6.5 per cent and inflation of 6.5 per cent is the best case scenario for next year. Disinvestment proceeds should add a chunk to total receipts, and for that the finance minister has to ensure that there is enough to attract foreign investors.

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