No Backing For Any Big Fiscal Push
This year’s Economic Survey was awaited by many, including me, to understand the government’s thought on many issues, especially growth perspectives post demonetisation, an assessment of how fast the economy can revive to near-trend path situation, how the Budget can be used to ease the pains of demonetisation and finally the long-term thought process of the government with respect to reforms and development. The Survey has not only highlighted the happenings of the previous year but also laid out a prospective thought-provoking big picture for the economy.
On growth, the Survey suggests that costs of demonetisation were from the contraction in the cash money supply. To this extent, the slowdown would be temporary as the remonetisation is expected to fully alleviate the cash squeeze by April 2017. The positive implications of the demonetisation effects would be to increase digitisation, greater tax compliance and hence an increase in long-run tax revenue collections. Importantly, the Survey indicates that the transition towards digitisation should be gradual and based on incentives rather than controls. The Survey points to a rather larger range of growth of 6.75-7.5% for FY18, indicating that there could be downside risks to growth emanating from global conditions of low growth and a reversal in the global oil prices. The Survey believes that over the mediumterm, other enabling structural reforms, including follow-ups on demonetisation and the implementation of GST, would boost growth to 8-10%.
With the Survey coming just a day before the Budget, market participants traditionally look forward to this document to throw light on the expected fiscal stance of the government. Precious little is generally obtained on this front. Even as the market had been vociferous on hopes that the Budget will provide for a consumption push and hence miss the consolidation target of 3% of fiscal deficit to GDP, the Survey does not seem to be too much in favour of any such significant fiscal push. True, the globe is now shifting its focus towards fiscal policies to provide the growth impetus. However, according to the Survey, India might not need to walk down this path as inflation in India continues to be higher than the global standards and hence counter-cyclical policies will have to be more sensitive towards triggering higher inflation with any policies aimed to boost demand. The debt-GDP ratio is higher than most other emerging economies and hence it would not be proper to employ any significant fiscal push.
In the context of the above and in the absence of the FRBM report being made public, we think the government would continue to try and comply as much as possible with fiscal consolidation. We think the Budget would point towards a 3.3% target of FD/GDP for FY18 and would wait for the benefits arising out of GST implementation or gains from higher IT collections through IDS-II to show better results.
Finally, the Survey advocated the concept of Universal Basic Income (UBI) as a radical new vision towards a strategy of redistribution. The argument is that the existing subsidies and welfare spending suffers from misallocation and thus should make way for cash transfers. The Survey argues that the poorest 40% receives only 29% of the total funding. However, the cost-benefit analysis of the same leads the Survey to conclude that the UBI as an idea may be costly in the immediate run and may not be ripe for implementation just yet but “is ripe for serious discussion”.