Ride on, if you can’t rein in, inflation

His budget proposals on Monday, therefore, didn’t promise to tame inflation, which is nudging toward 10% on account of such factors that are mostly beyond the government’s control. Instead the budget has sought to cushion such target groups that spiralling prices hurt the most.

By proposing to link wages paid under the National Rural Employment Guarantee Scheme to increase in consumer prices, the finance minister has offered a much-needed relief to more than 42 million wage labourers across the country.

Equally important is the response toward another group vulnerable to inflation — the retirees, most of whom have fixed incomes. The budget has proposed to reduce the qualifying age for senior citizens from 65 to 60 years and raised the income tax exemption limit to R500,000 for those above 80 years.

As for the urban middle class, the relief is not as much in what the finance minister did as in what he didn’t do.

Against a widely expected hike in the standard excise duty, the budget proposed to keep it unchanged at 10%. There is, however, an increase in excise duty on some goods of daily use such as biscuits, tea, packaged vegetable and sauces -– from 4% to 5 % and 0% to 1% — and a widening of the service tax net, which would likely make you spend more on healthcare, eating out as also running your household.

Mukherjee didn’t announce any major tax concessions, except for a marginal increase in the exemption limit from R160,000 to R180,000. He may have made some announcements for poll-bound states, but populism clearly didn’t get as much a share in government spending as some had expected. The result: a moderate increase in spending is likely to help cut fiscal deficit from 5% this year to 4.6% in 2011-12 and 4.1% in 2012-13.

If the fiscal situation improves, it takes pressure off the Reserve Bank of India and allows it room to ease money flow in the system. That, in turn, would mean the impact of inflation on interest rates, and therefore, growth of the broader economy, would get somewhat moderated.

There are, however, some measures that cause concern. The decision to allow foreign investment in mutual fund and infrastructure debt may result in a surge of hot money that may offset the central bank’s efforts to check inflation.

That said, the budget does try to address the structural issues driving up prices, especially those of food products.

Mukherjee announced a host of measures to improve farm productivity, efficiency in procurement and distribution of food produce and incentives for increasing private investment in agriculture. But we will have to wait to see these measures bear fruit.