The government set out its budget statements with the assumptions that growth will be high and inflation controlled. Will the government manage to pull it off? We believe there is a very strong probability that it can. To begin with, on the growth front, all growth estimates for the year ahead are in the 8+ range, our estimate, as stated for a couple of months now, is of 9.2% for 2011-12 and the government has gone in line with that. The reasons of course are quite clear, there is a strong growth momentum and the economy has reverted to its pre-crisis growth path, going forward the rate hikes to counter inflation will be moderate as the government has put growth ahead of inflation in its objectives. Moreover, by effecting a much lower fiscal deficit target, there is some support coming in from the Central Government for the central bank now, who will not be seen as the sole fire fighter.

The government’s intent towards fiscal consolidation is the single biggest takeaway from the budget proposed. This it has managed, not by tax changes but by curtailing expenditures. The message has come through clear, the deficit that reigned at 6.4% in 2009-10 is within two years set down to 4.6%. The impact on inflationary pressures going ahead is therefore likely to be very positive. In the medium term though, the government is anticipating a 4-5% inflation rate for 2011-12 and this is one crucial input in its calculations that may not be so easy to pull off, as much depends on fuel and food prices.

Food inflation that was trending down has seen a sharp uptick over the last two months, impacting consumer price inflation, though the hope is that no other commodity spikes up as onion did last quarter. When it comes to crude oil prices, there is of course much uncertainty. Yet, given that the recent spikes are due to political disturbances rather than any fundamental change in demand and supply, in all probability oil will settle in the $90-100 a barrel range this year, provided the turmoil in the Middle East resolves soon. We are set to see higher commodity and food prices though globally. Global economies are on a recovery path, albeit wobbly still; the Global PMI being tracked by JP Morgan/Markit for around 20 countries showed its highest rise in manufacturing activity since May 2004 in February, while prices rose at the fastest pace in two and a half years. And then there are weather conditions that would impact supplies and prices globally, but these are perennial uncertainties that we need to learn to live with now. What is important is to get the systems in place within the country to deal with shortages, especially temporary ones, and here unfortunately we continue to see very little action.

There is the intent to go in for a more transparent and effective subsidy system, for kerosene, LPG and fertilizers to begin with. These are reforms that were begging to be introduced and the fact that a start shall be made soon is extremely encouraging. However, the PDS remains untouched in the states, the entire system needs an overhaul to stop wastage and spoilage. Can we hope for a cash transfer system for food as well sometime in the future?

All in all, the budget proposed has left us with more hope than we had a month ago. We would not count ourselves in with the sceptics who feel that the deficit target may not be achieved, the growth and inflation numbers are too rosy etc. As benchmarks and goals go, those set for the year ahead have a fair probability of being achieved.

P.S. Indicus is pleased to announce the launch of its Centre for Financial Inclusion, with support from the Bill and Melinda Gates Foundation.