Thoughts on Indian budget 2007-8

The budget proposals presented recently have attracted lot of flak for lack of focus, industry orientation and weak steps to control inflation.

The growth-inflation conundrum has engaged economists for the past for decades. In the post war period, a negative relation was recognized and it was believed a low rate of inflation was good for the economy while higher rates of inflation were harmful for growth. Moderate inflation rates were deemed to be below 10 per cent, while rates above that were seen as detrimental to the growth of the economy in the long run. It is now widely believed that inflation is a key macroeconomic variable to be managed.

Is inflation in India high? Seen as a statistic, an inflation rate of 6 to 7 per cent can not be considered to be high. However, what is important is the perceived level of inflation, especially by the large masses in the lower and middle classes. The index perhaps can not capture the true significance of a 50 to 100% price rise in essential commodities which has a telling effect on the quality of life of the poor.

Has the budget impacted the industry? In one sense it has, by keeping the status quo intact, not imposing any fresh taxes or creating any further adverse impact. Industry therefore should be happy that these are no futher adverse policy constraints.

A direct proportional link between money supply and inflation (as envisaged by monetarists) is possible only under endogenous and full employment conditions. However these conditions don't obtain in India. Not only is there sufficient slack available on the supply side in all factors of prodution, there is more openness of the economy due to increasing globalisation, especially in the context of increasing FDI/FII levels.

The budget has rightly attacked the rigidities on the agricultural side. In fact much more should have been done to strengthen agricultural infrastructure, especially research, imputs, easier marketing and better price support mechanisms. This would have not only eased the inflationary pressures on foodgrains, but also provided the stability needed for industry to build up on.

Absence of negatives on the individual and industry fronts can itself be seen as a major positive. In short by steering a level course and curbing inflationary tendencies, the budget needs to be applauded by keeping the obstructionist forces in check, even if it means sacrificing growth rates by a percent or two. Overall it can be seem as a mid-course steadying exercise.

There has rightly been a focus in development of social and physical infrastructure which should provide the right wherewithal for a speedy, sure and steady growth rate of 8 to 9% envisaged in the next plan period. Education, health, agriculture and increasing globalisation have rightly received the attention required in the current scenario. Even reduction of excise duties and price controls on steel and cement may indirectly aid growth by hastening the development of infrastructure at a reasonable cost. At the same time, making credit a wee bit difficult and costly is probably a way to curb too much money chasing too few goods leading to better utilization of resources and reduction of slack in the system, financial and physical.

Overall, the budget proposals have indicated that in the breakneck speed for growth, there is need for moderation, control of inflation, and a mid course steadying exercise towards inclusive development.