The Missing Feel-good Factor

Finance Minister Jaitley has been prudent financially and focused on some good proposals, but he has not unveiled any breakthrough idea

T he first post-demonetisation Budget has been cautiously praised by most economists and analysts for being pragmatic and restrained and focusing on the right things. Given the slow growth of big private investment in greenfield projects to create lots of jobs, the government has tried to tackle the problem partly through tax incentives to the micro, small and medium enterprises (MSME) sector, which accounts for a tad over 37 per cent of the GDP (taking manufacturing and service firms into account). He has proposed even higher spending on infrastructure, which has been the government’s focus for the past two years anyway. The logic is that infrastructure spending boosts economic growth both directly and indirectly. Directly, through the demand it creates for labour and materials such as cement and steel, and indirectly because it gives a fillip to economic activities in areas close to the road or port or railway line being built. He has also allocated more for agricultural activities and rural sector, including the highest ever allocation for the MGNREGA programme. They are all designed to boost farming and rural income, and hopefully increase rural consumption. Given that the rural areas were badly hit by the demonetisation exercise, this is a pretty good step.

The biggest praise, though, comes for avoiding any dramatic steps – or radical ideas that would again create a lot of uncertainty in the economy. Businesses and people still recovering from the demonetisation shock, heaved a big sigh of relief. The fact that the FM chose not to impose many of the taxes on market participants or make changes in the long-term capital gains taxes sent the markets soaring almost 500 points. It was, as one market analyst pointed out, more because of the shocks that were expected but did not happen.

There’s also been some commentary on how the FM did not make any announcements even in the social sector like the universal basic income proposals that were mentioned in the Economic Survey and were talked of even earlier.

My view is that all those expecting radical or big policy ideas in

the Budget were misreading this government’s signals. If you look at the past three Budgets, the finance minister has stuck largely to bread and butter proposals and ideas. He has remained committed to fiscal conservatism, and avoided making any dramatic announcements – economic policy or otherwise.

In fact, the most important feature of this Budget has been that it has essentially stuck to more of the same – increasing allocations in areas where the government was spending more in any case over the past two years.

That should have been expected because it is the prime minister who makes all the big announcements and has always signalled where the government is moving. Not the finance minister who ties up the details. Whether it is in terms of Make in India, Swachh Bharat or Demonetisation, they have all come from Prime Minister Narendra Modi, and generally at a time of his choosing. The finance minister, or the Budget, has little role in the really big policies of the government other than to perhaps introduce a cess or a surcharge for those pet projects.

The other important conclusion that one comes to after reading both the Budget and Economic Survey is that at least the finance ministry is beginning to worry about the effects of demonetisation. The Economic Survey is more upfront about it – saying that it will affect this years growth projections of the baseline 7 per cent by anywhere between 0.25 and 0.5 percentage points. And giving next financial year’s GDP expectations at between 6.75 per cent and 7.5 per cent. The finance minister pretends to ignore any possible drop in GDP in his Budget projections – with a nominal GDP growth of 11.75 per cent in FY 2017/18, which seems a tad optimistic. However, his revenue projections are far more restrained. Receipts are expected to grow at 6.6 per cent. His spending itself, shorn of the rhetoric in the Budget speech, is also inclined to be conservative. In real terms, he has allocated roughly 11 per cent more both for his rural push as well as infrastructure spends after one takes into account the revised estimates for this year. (The finance minister took his budget estimates for last year for these two in his speech, instead of revised estimates).

For those who were looking for a Budget that could spur big private investment, there is bound to be disappointment because there is nothing that the Budget signals in terms of either tackling bank NPAs and recapitalising them, or incentives that will promote private investment on the ground in a new sector, or even boost urban consumption in a big way.

What about job creation then, which is another big goal for the Modi government. The Budget tackles the problem of jobs at the bottom of the pyramid through its many infrastructure and rural-oriented schemes – but these are not high quality job creation of the kind that the growth of IT/ ITES, the power sector, telecom or organised retail did in the past.

It is a good Budget and will stimulate the economy through a variety of measures. But probably not very quickly and not enough for the feel-good factor to return in a hurry. ~

FM’s revenue projections are far more restrained. His spending itself, shorn of the rhetoric in the Budget speech, is also inclined to be conservative 11% Rise in allocation for rural push as well as infrastructure after one takes into account the revised estimates for this year