The low point in India's economic cycle lifts expectations from the 2013 Budget well above those in the past three years. Would 'good economics' prevail over 'good politics' in the penultimate Budget before the next general elections?
Economic policy was rather late to respond to the challenges faced by India in 2012. But the reforms in recent months reveal the will to overcome the political resistance to unpleasant but necessary measures. The fallout of higher diesel prices has turned out to be rather mild compared with the widely held fears, both politically and economically. This should firm up the government's resolve to press on in more areas, particularly the power sector.
The fiscal space being created due to the shrinking fuel subsidy should enable incentives to catalyse long-needed changes at the state level in the distribution of power. The obstacles to power sector reform may seem daunting. The progress made in the pricing of petroleum products prove that the obstacles can be overcome and lead to a large improvement in economic sentiment. Power sector reform can also lead to large improvement in industrial activity and may also help to revive the investment activity.
Foreign portfolio inflows are a critical element of India's balance of payments given the wide current account deficit. Their stability requires India to deliver on the recent promises to stay within the targeted fiscal deficit. One hopes that the cutbacks that may be demanded by this goal will spare expenditure that is essential to revive investment demand and to shore up the nation's infrastructure. It is equally critical that the drive to maximise revenue does not blunt the entrepreneurial instinct that preserves India's competitive edge among the emerging markets. Some of the extreme measures to enhance near-term tax revenues could also pull down GDP growth over the medium term apart from their potentially deleterious effects, such as tax evasion and capital flight.
India's energy imports may persist for long. The addition of thermal coal to the import basket in the past decade makes a structural addition to the current account deficit (CAD). Rational pricing of downstream products, such as diesel and electricity, may cut waste and optimise the consumption of fossil fuels. However, the material change in the fuel component of the CAD requires India to maximise the production from domestic resources. The obstacles in the path of quick progress on coal mining are well known. There are a few sensible solutions to this issue that would also preserve the environment. This budget would go a long way if it defines the path for quick execution of approvals for new coal mines.
'Good economics' for India in 2013 would be a return to the high growth path without diluting fiscal stability and also strengthening the current account. Success in this endeavour need not conflict with 'good politics'. Faster growth in government revenues and a wider tax base would only enable the social objectives of reducing poverty, enhancing the skills of India's young population and providing a livelihood to all. The challenges faced by the finance minister are severe compared with past years but the benefits too are enticing. The Budget presented by the Minister in 1997 had been described as the "Dream Budget". Resolving the challenges of 2013 could make the forthcoming Budget as memorable as that one.
Ranu Vohra is the MD & CEO of Avendus Capital