ROUGH WEATHER AHEAD

MAINTAINING FISCAL DISCIPLINE WHILE TACKLING RURAL DISTRESS AND A JOBS DROUGHT MAKE BUDGET 2018 A TIGHTROPE WALK FOR ARUN JAITLEY

Maintaining fiscal discipline while handling rural distress and a jobs slump makes Budget 2018 a tightrope walk for Arun Jaitley

BUDGET 2018-19 WILL BE ONE of finance minister Arun Jaitley’s toughest challenges. Although this will be the NDA government’s last full budget before the general elections next year, Jaitley cannot afford to be profligate to please the various constituencies as that would mean slipping on the fiscal discipline he has maintained so far. The wiggle room has further narrowed due to glitches in the implementation of the Goods and Services Tax (GST), resulting in lower-than-expected revenues from indirect tax collection. GST collections in November 2017, at Rs 80,808 crore, were the lowest since the tax regime was implemented in July 2017, compared to peak collections of over Rs 94,000 crore in July. At the same time, the clamour to pump prime growth has never been louder, thanks to demonetisation, which put the economy on the back foot, with growth for 2017-18 projected to drop to 6.5 per cent compared to 7.1 per cent the previous year. Crude oil prices have been rising, crossing the $70 a barrel mark, threatening to upset the current account deficit while stoking inflation. Rising oil prices threaten to take away the government’s windfall gains in the previous three years in terms of a lower oil bill, further constraining its ability to ramp up expenditure.

With the Gujarat election verdict showing waning support for the BJP in the rural areas, there is now some urgency about addressing rural distress. Central Statistics Office estimates show the farm and allied sector grew at 2.1 per cent in the current financial year compared to 4.9 per cent in the preceding year. As Ashok Gulati, economist and professor at the Indian Council for Research on International Economic Relations (ICRIER), puts it, “It is not a secret anymore that farmers have suffered during the last threeand-a-half years of the Narendra Modi government, first from two successive droughts and then from tumbling agri prices.” In the first four years of the Modi government, agri-GDP will register an average annual growth rate of around 2 per cent, almost half of what was achieved during the 10 years of UPA rule, he adds. Farmers have been at the receiving end both in plentiful times and during droughts. Since they bear all the costs upfront, they need to find ways and means to support themselves for as many as 120 days before they get paid for their produce. “You need capital for that, and banks will ask for collateral,” says Ajit Ranade, chief economist at the Aditya Birla Group.

SOME UNION MINISTERS SAY JOBS, agricultural growth and agricultural income are the big issues to be addressed in the budget. “There isn’t a single sector that is creating as many jobs as, for instance, the IT sector did at one time,” says a minister on condition of anonymity. It is also paradoxical that despite a slew of reforms, the economy is not running to its full potential. Investments have fallen from 34.3 per cent of the GDP in 2011-12 to 27 per cent in 2016-17. Advanced estimates show investments have further fallen to 26.4 per cent in 2017-18. Estimates of the Centre for Monitoring Indian Economy (CMIE) show new investment proposals are likely to amount to around Rs 8 lakh crore in 2017-18—merely 60 per cent of the new proposals made in 2016-17, the lowest since 2004-05.

The Modi government came to power with the promise of creating 10 million jobs every year, but only a fraction of that has been achieved, according to government data in May 2017. Top IT firms, such as Wipro, Tech Mahindra and Cognizant, made huge job cuts in the face of poor business prospects, tougher hiring norms in countries such as the US and Australia, and a higher rate of automation in business. Plenty of jobs are also being lost in telecom as it goes through a phase of consolidation. Some consultants say the sector lost around 40,000 people in 2017 and the trend is likely to continue. India is set to see a further 30-40 per cent reduction of jobs in manufacturing in 2017-18 compared with the previous year, according to recruitment firm TeamLease Services.

Many would also like to see a roadmap on the ongoing reforms in the banking sector. The government has kicked off a bankruptcy process under the Insolvency and Bankruptcy Code (IBC) aimed at cleaning up the bad loans pile in the banking system—close to Rs 8 lakh crore up to March 2017. In November last year, a presidential ordinance tweaking the IBC to bar promoters of defaulting companies from regaining control of their assets being sold under the bankrupt-

Now is the time for lollypops. The question is how sweet should they be A MINISTER IN THE MODI GOVERNMENT

cy process had stirred a hornet’s nest. This is because it is feared that with the majority of promoters ineligible to bid for their companies, the potential value of the assets could drop considerably. Many resolutions will be challenged in court, so the insolvency process is likely to be protracted. That calls for greater clarity on the IBC process. On January 24, the government announced a further roadmap for the Rs 2.11 lakh crore bank recapitalisation programme it put forward last year, including bank-wise allocation. This, say experts, would be sufficient to meet the capital requirements for public sector banks for fiscal 2018.

SO WHAT ARE JAITLEY’S OPTIONS? His colleagues say the FM should allow a nearly 50 basis points slippage in the fiscal deficit target. That will release an additional Rs 80,000 crore of spending for the government, which it could direct towards construction, infrastructure and affordable housing. There could be a scheme on the lines of the Universal Basic Income, which could direct cash towards Below Poverty Line (BPL) families. “You need sugar highs,” remarks a minister in the Modi government. “Now is the time for lollypops.

The question is how sweet should they be.”

According to a report by Kotak Institutional Equities, the government is likely to increase spending majorly. “We expect the government to show a significant increase in expenditure on infrastructure and rural economy, matched by an increase in taxation revenues of 15 per cent,” said the report. The Modi government’s total expenditure has been on the rise, increasing at an average rate of 8.4 per cent from 2014 to 2018.

Those present at the prime minister’s meeting with economists on January 10 say the one phrase heard repeatedly was ‘no harm budget’—neither too populist nor reformist. None of those present suggested the economy needed a stimulus. Almost all suggested a fiscally conservative approach instead. There is also an indication that the government will bolster its revenues from financial markets and could relax rules related to taxation of capital gains from shares and increase the holding period for long-term capital gains from shares to over two years (it’s currently one year). The government is also likely to pursue its divestment agenda more aggressively. It has raised Rs 54,337 crore so far against its 2017-18 target of Rs 72,500 crore, of which nearly Rs 15,000 crore is through strategic sales. An economist present at the meeting says if the government plans early on its strategic sales, it will be able to achieve its target. None of the agriculture experts present at the meeting reportedly recommended raising the minimum support price or expanding the employment guarantee scheme. The tenor of the discussion was largely that the farmer does not want to do farming and the challenge is to create other employment opportunities. The finance minister, say sources, was of the view that since 80 per cent of the revenue goes to the states, it was for the states to take up populist measures, and not the Centre.

Economist Intelligence Unit (EIU) editorial director Robert Ward expects a relaxation in the fiscal deficit target, a push towards public investment in infrastructure, and farm loan waivers. “The budget will have to strike a balance between the political requirements of the prime minister’s friends and what the economy needs,” he says. “We look at India till 2050. For the longer term, GST will bolster the supply chain, which will have a multiplier effect on the economy.” India continues to be low in the EIU’s ease of doing business rankings because of bureaucracy, corruption and issues in the inter-state movement of goods, adds Ward.

SOME EXPERTS SAY THE GOVERNMENT may announce more sops for the construction sector, one of the biggest contributors to informal jobs. Another way to boost employment is by increasing the maximum number of work days permitted under the rural employment guarantee scheme from 100 to 150. Despite the fiscal constraints, there could be higher fund allocation for infrastructure, such as affordable housing, roads, renewable energy, railways and ports, to spur investment and create jobs. Most experts feel the government need not limit itself to the 3 per cent target of fiscal deficit to GDP ratio. “Fiscal discipline is announcing a target and sticking to it. It does not mean mindlessly going to 3.5 or 3 per cent (of the GDP),” says Ranade. For 2017-18, the government had aimed to bring down the fiscal deficit to 3.2 per cent of the GDP. However, it crossed the target by the end of November. At Rs 6.12 lakh crore, fiscal deficit was 12 per cent more than the targeted Rs 5.47 lakh crore.

What do the various sectors expect from the budget? Real estate, which has been shaken up by demonetisation and the Real Estate (Regulation and Development) Act, is looking for a single window clearance and approval process for residential projects. “Single window clearance can significantly reduce project cycle times, allowing developers to focus on their core business of executing projects,” says Anuj Puri, chairman, Anarock Property Consultants.

The textile sector, which has a 13 per cent share in India’s export earnings, has been under pressure. While apparel exports have shown sluggish growth due to intense competition, yarn exports have suffered due to poor

The budget should strike a balance between the political requirements of the PM’s friends and the need of the economy ROBERT WARD Editorial Director, Economist Intelligence Unit

offtake from China. “Adequate budgetary allocation for schemes such as refund of state levies and interest subvention benefits can help improve the competitiveness of Indian textile exporters in the international markets and increase India’s textile exports,” says Jayanta Roy, group head, corporate ratings, ICRA.

Telecom is looking for customs duty exemption for equipment required for 4G network and telecom devices, rationalising the tax rate on independent distributors of prepaid vouchers and SIM cards and exemption of taxes in Right of Way (RoW) transactions between telecom firms and agencies such as municipal corporations. “Penetration of the telecom network till now was aided by customs duty exemptions given to 2G and 4G network equipment, which helped reduce cost for the consumers,” says Rajan S. Mathews, director general of the Cellular Operators Association of India. “Unfortunately, the government has withdrawn customs duty exemptions on telecom equipment to promote local telecom equipment manufacturing.”

Surely, with uncertain revenue collections, a wobbly economy and looming elections, the budget will be a trapeze act for the finance minister. In such circumstances, for the first time, he may be willing to give fiscal discipline the slip to address teething issues on the farming and jobs fronts.