Budget 2012: India could have its cake and eat it too

MUMBAI Fri Mar 16, 2012 4:03pm IST

Finance Minister Pranab Mukherjee (2nd L) poses as he leaves his office to present the 2012/13 federal budget in New Delhi March 16, 2012. REUTERS/Vijay Mathur

Finance Minister Pranab Mukherjee (2nd L) poses as he leaves his office to present the 2012/13 federal budget in New Delhi March 16, 2012.

Credit: Reuters/Vijay Mathur

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MUMBAI (Reuters Breakingviews) - Finance Minister Pranab Mukherjee took the path of least resistance in his budget. The UPA government is still reeling from the loss of mid-term regional elections and the increasing fragility of its coalition. Hope that he would rein in spending on subsidies and kick-start the economic reform process now looks like wishful thinking.

His budget has set a 5.1 percent fiscal deficit target for the year ahead. But while a deficit of that size is not ideal, it's not a big problem for India. As long as nominal GDP rises faster than the total debt, the ratio of debt to GDP will fall. India's fiscal deficits have risen since 2008, but the key ratio of debt-drag has dropped from 69 to 64 percent. The deficit need not be New Delhi's number one concern.

But structural reform is another story. It's essential -- and largely missing.

The deficit spending will boost demand for consumption goods, but if production does not also rise, the extra money will only fuel India's inflation problem. Better governance and more economic reform are required to unblock the investments needed for higher production. It's the virtuous circle of economic growth.

Mukherjee may not have had enough political wriggle room to rein in fuel subsidies, but he might have been able to ask for something more in return for keeping the taps open and the cash flowing. Land and mining reform might not have required too much political capital to kick things off and build investor confidence.

If big ticket initiatives such as raising caps on foreign direct investment are considered a step too far, the government could get to work on the nuts and bolts of doing business in India. It could strive to reduce the time it takes to set up a business (and to wind one down) and reduce the number of forms, permits and licences.

Mukherjee and his boss, Manmohan Singh, have the tools at their disposal to set the economy on a stronger path. Sadly, they seem never to miss an opportunity to miss an opportunity.

CONTEXT NEWS

-- Finance Minister Pranab Mukherjee said he expected GDP to grow at 7.6 percent in 2012/13 during his budget statement on March 16. He predicted that this year the fiscal deficit would be 5.9 percent of GDP, exceeding the target of 4.6 percent he set in last year's budget. He set a target of 5.1 percent for the year 2012/13.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Edward Hadas and Sarah Bailey)

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