Budgets are all about making realistic projections

When nothing works, it is the over-the-top 'assumptions' or projections that come into play to rescue Budget writers. The Finance Minister Pranab Mukherjee's last year Budget is a grim reminder of assumption or projections going haywire. The 77-year-old Mukherjee is no beginner in scripting budgets. The seasoned politician who was also the finance minister in the days of Prime Minister Indira Gandhi actually presented his first budget some three decades ago. So what punctured a budget 2011-12 that was hailed as development-oriented?
 
In retrospect, it was clearly a case of unrealistic projections. Remember that inflation was nowhere near the comfort zone. In fact, Mukherjee himself said that inflation is a principal concern. The interest rates were raising their head and it was left to the Reserve Bank of India (RBI) to tame it through monetary measures. The European debt crisis was also building up gradually to engulf any hopes people had on speedy recovery of growth momentum.

Against this grim backdrop, India settled for a much higher 9 per cent growth projection with a plus or minus change of just 25 basis points. GDP was at 8.4 per cent each in the previous two years. The finance minister should have been reasonable. But unlike economists, politicians never believe in the mantra of under promise and over deliver. Look at how the actual GDP growth figures in 2011-12 are languishing from 7.7 per cent in June quarter to 6.1 per cent in December quarter. The GDP estimates are now for 7-7.5 per cent growth for 2012-13.

Whether Mukherjee will stick to the bottom range of 7 per cent GDP or bet on a somewhat unrealistic figure of 8.0 per cent is something everyone will look out for in the budget. Any higher GDP projection will inflate revenue projections, too, and justify many budget numbers. There is a real danger to growth posed on many fronts. Investment activity has slowed down in the economy because of general slowdown and higher interest rates. Reforms have taken a backseat and the stock market has been a wealth destroyer in the last three years. Crude oil prices are still in the danger zone. The Brent crude prices have been at over $100 per barrel in the last one year. The crude prices are at $126 per barrel in the month of March this year.

Crude has all the potential to fuel inflation, raise the subsidy burden and also keep interest rates at a high enough level to kill inflationary pressure. There is also danger looming large from the Israel-Iran possible conflict. India is miserably placed in the Iran issue with historically strong trade ties with Iran.

Mukherjee's other headache is the growing trade deficit and the current account deficit. There has been a net outflow of dollars. These twin deficits are putting a huge pressure on the domestic currency. The rupee, which was at 45 to a dollar in January last year, breached the 53-54 mark to a dollar by January this year. The RBI was forced to intervene through unpopular measures like banning forward contracts and also introducing sops like deregulating NRE deposits. The twin measures on both demand and supply side actually helped on recovering the currency to the level of 49 to a dollar. Faced with sluggish dollar inflows through foreign institutional investors and the FDI route, RBI is now banking on a very volatile NRE source to raise dollars.

NRE deposits are classified as short term debt and are part of a country's external debt. The RBI has to put a lid on it at some stage. So assuming oil prices remain at the level where they are today or go down in future, a depreciating currency will spoil budget assumptions because of expensive imports, especially oil imports. So the danger of higher oil prices comes from both ends.  And this could derail the budget estimates. So Mukherjee has to tread carefully while making assumptions for a realistic Budget 2012-13.