In the past few years, there has been some debate whether the budget announcing exercise of the government still remains as important an event on the calendar as it used to be. The Union Budget 2009-0 to be announced on July 6 – should have no such problems. Being delivered at a time when the major developed economies are mired in a recession and the domestic economy is in the midst of a slowdown, there are myriad expectations from the forthcoming Budget.

There are four broad areas that the budget must definitely articulate upon. First, given the losses that the export sector has suffered, the budget must set up an agenda for relief for that sector, an agenda that goes above and beyond immediate sops. Second, quite obviously, the economy will continue to need a substantial push even as it is expected to start reviving in the second half of the current financial year. Third, the budget must signal the approach towards the management of the large fiscal deficit. Last, and perhaps the most critical from a long term perspective, is that budget must set up a direction on reforms.

The slump in global demand has led to a marked decline in India’s exports in recent months. The scale of the crisis is evident from the fact that despite the depreciation of the rupee against the dollar, exports (in rupee terms) clocked a decline of 15 per cent and 16.4 per cent in March 2009 and April 2009 respectively. The contraction in exports is having a strong bearing on growth in industrial production, as well as severe socio-economic consequences in terms of huge job losses. In order to mitigate the impact of global economic downturn, the Budget should focus on measures that are aimed at improving the competitiveness of Indian exporters. The government needs to focus on policies that reduces transaction costs and improves productivity of Indian exporters. This will ensure sustained export growth even during adverse developments in the global markets.

Of course, development of infrastructure will be key to achieving some of the objectives enumerated above. Infrastructure ought to be a major focus area of the Budget for reasons above and beyond support to the export sector, as it will give a much-needed impetus to the flagging economy while also filling the large gap in infrastructure in the country. Given that the fiscal deficit is already at a high level, it would be challenging for the government to apportion more funds in this direction. Therefore, the Budget must gear towards evolving a constructive and stable policy environment aimed towards attracting private participation in infrastructure projects. India has been successful in attracting private investment in infrastructure since the initiation of reform process. However, a large portion of these investments have been in sectors where the return on investments and commercial considerations are high. Between 1990 and 2006, telecom accounted for 50 per cent of investment commitments to infrastructure projects with private participation, followed by energy (29 per cent) and transport sector (21 per cent).

The Budget should focus on exploiting private sector participation in other infrastructure sectors by introducing investor friendly policies and bringing about more transparency in operations. Although the creation of IIFCL (an SPV created to fund projects in the public and private sectors as well as public-private partnership (PPP) scheme) has been able to expedite infrastructure projects, it needs to be noted that IIFCL can fund only up to 20 per cent of the total project cost. At a time when domestic and global investors have turned extremely risk averse, the infrastructure funding gap has increased to a great extent.  While the government have eased ECB norms and authorised IIFCL to raise Rs 100 billion through tax free bonds for refinancing bank lending of longer maturity to eligible infrastructure bid-based PPP projects, these measures may not be sufficient to achieve the infrastructure investment target of $ 514.06 billion during the Eleventh Plan period. The Budget should therefore take initiatives to augment the funding for infrastructure projects. This would require some regulatory intervention and policy measures.

Additionally, policy must be geared towards attaining optimum results from the expenditure that has already been announced towards infrastructure development, and the pace at which infrastructure projects are implemented must be improved. Persistent delays in mega infrastructure projects primarily due to bureaucratic hurdles and poor planning have led to time and cost overruns in their implementation. For instance, as per the Ministry of Statistics and Programme Implementation, out of 552 projects in the central sector each costing Rs 100 crore and above at the end of March 09, about 280 projects have witnessed delays in their execution due to varied reasons. With only 146 projects on schedule and 8 projects ahead of schedule, these projects have already overrun costs by 11.59 per cent. Such delay discourages private as well foreign investors from making huge investment in infrastructure projects. It is therefore important to speed up the implementation of large-scale infrastructure projects to boost demand in other sectors of the economy and thereby mitigate the economic slowdown.

An increased spending on infrastructure has the potential to retrieve the economy from the current slowdown; however, it must be channelized from the private sector, or it will place a huge burden on the Centre’s already strained fiscal position. The fiscal deficit (Centre and State) is expected to be as high as 11 per cent in FY’09. Moreover, in the current economic realities, there is limited scope for revenue mobilization. The government is therefore faced with the twin challenge of ensuring economic growth momentum and at the same time ensuring fiscal prudence. While it may not be possible to see immediate reductions in the fiscal deficit, the medium term blue-print for it must be put up. It is necessary to initiate comprehensive expenditure reform programmes that focus on enhancing the efficiency and accountability of public expenditure and bring about greater transparency of public expenditure. The growth of non-plan revenue expenditure also requires to be curtailed; the new targets under the FRBM Act must be articulated.