Business

Can India's 2011 budget overcome soaring prices?

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Media captionWhat would families like from the budget?

It's 20 years since Prime Minister Manmohan Singh, then finance minister, unveiled the budget that launched India's opening up to the global economy.

That budget also paved the way for India's current heady growth.

However inflation is now becoming a problem - food prices have been rising rapidly - and India's reform programme appears to be drifting

Will the 2011 budget mark a return to form?

Petrol prices have gone up on an almost monthly basis since the government decided to deregulate them last year. Those at the bottom of the economic ladder are hardest hit.

Food prices are still over 11%.

The problem for the government is that much of the inflation comes from factors beyond its control.

To tackle rising prices, the Reserve Bank of India has increased interest rates. That in turn has spooked investors, who worry that the country's soaring growth may slow. The prime minister says he's still aiming for 10% growth this year.

But foreign direct investment has tumbled - down 22% in 2010 over the previous year.

And so far, higher rates show little sign of taming rising prices.

Creating growth

So what can the government do in the current budget?

President Pratibha Patil opened the latest session of parliament last week and flagged up the government's interest in tackling inflation, creating jobs and fighting corruption.

It knows that there are plenty of bottlenecks in the system, which prevent the economy reaching that target of double-digit growth.

"I think the economy has been growing despite the lack of reforms," says Crisil chief economist Dharmakirti Joshi.

"But you can't take growth for granted. It's fairly well understood that infrastructure bottlenecks etc, they're really holding the economy back."

Many of India's roads are congested, and the railways need more investment.

The government wants to spend $1 trillion over the next five years upgrading infrastructure, which has been overloaded by the economy's rapid growth. It's hoping that the private sector will come up with much of the money.

However if the financial sector is to furnish those funds, further change is necessary to help it develop.

Politically unpopular

Reforms of banking and the insurance sector have been languishing on the back burner; they might now get the go-ahead.

Retail reform, too, has long been talked about. Foreign supermarket chains have the expertise to modernise the shipment of food from farms to shops. That could bring down prices.

But it remains politically unpopular with the country's thousands of small shopkeepers. Several states go to the polls later this year, making the government acutely aware of voters' concerns.

It may decide to increase the aid it gives to poor rural farmers.

The government also wants to encourage industry to create jobs for migrant labourers. Only by industrialising faster can the country achieve its ambitions for growth.

"In today's world, you have to be fairly competitive," says Joshi.

"If you want to promote your manufacturing sector without physical infrastructure, without some of these labour reforms, it'll be very hard to compete with other economies."

Unprecedented wealth

But economists are divided over whether the government has lost its appetite for reforms that may be politically unpopular.

Structural changes are needed to lay the foundations of the next phase of India's growth. In the meantime, its industries are booming, unprecedented wealth is being created and millions of people are being lifted out of poverty.

The cities are teaming with luxury stores, new restaurants and coffees shops for the growing middle classes.

Those unpopular reforms, the government may decide, can always wait for another day.