Yes, But Will the Best of Intentions be Good Enough?
Many expectations have been unfurled. Now will come the follow-through for the delivery. Can GoI walk its impressive talk?
It is against the background of declining economic growth and continuing disruptions caused by demonetisation that the Budget for 2017-18 had to be framed. The tasks before the Budget were clear. It is aware of them and makes frequent references to the need for accelerating growth through raising consumer demand and increasing investment. How does the Budget measure up to these expectations? First, on the fiscal deficit. The Budget proposes to contain it at 3.2% of GDP — a little below current year’s deficit, and a little above the level projected earlier. Given the extraordinary circumstances, perhaps the relaxation is justified. The Fiscal Responsibility and Budget Management (FRBM) Review Committee apparently wants to focus on ‘debt to GDP’ ratio even though it has concluded that a fiscal deficit of 3% will be consistent with the new objective. There is considerable logic behind the prescription of a Budget deficit of 3% for the central government and 3% of GDP for all states together. This is in line with household savings in financial assets that, if anything in recent years, has been declining. In 2016-17, interest payments of the central government constituted 46% of the net revenue of the Centre. This is a large preemption. In fact, it has become customary for every Budget to project a new road map. Too many pause buttons will only make a mockery of the FRBM Act. Expenditures are the focus in the Budget for achieving the two-fold objectives of raising investment and increasing consumer demand. Expenditures can be classified into three categories: (a) Those aimed at accelerating growth directly. Capital expenditures fall in this category. (b) Those aimed at increasing consumption demand. (c) Those from a social welfare angle. The projected growth in capital expenditures for 2017-18 is 25.4%. This is, indeed, a substantial increase. This may, however, include capital expenditures of Railways, making the comparison with the previous year difficult. However, the emphasis on infrastructure expenditure is welcome. But some clarity is required as to how much of this comes from the Budget and how much from other sources. In fact, much of the public investment comes from public sector undertakings (PSUs). A detailed listing of expected investment by PSUs would indeed be helpful. There is a large list of programmes and schemes indicated in the Budget speech. Many of them are extensions of existing ones. Nevertheless, they add up to a substantial amount. But their impact depends on how well they are executed. The pick-up in rural demand heavily rests on this. Gross tax revenue is expected to increase by 12.3% in 2017-18 over the revised estimates for 2016-17. Nominal GDP in 2017-18 is expected to increase by 11.75%. This gives a tax buoyancy of little above 1%. This is reasonable. On the tax side, there are no fundamental changes in the tax structure. This, in some ways, is welcome. The reduction in the corporate tax applies only to MSMEs. The reduction in the income-tax rate for the lowest slab is better than raising the exemption limit. We cannot afford to reduce the tax net. The Budget could have announced the changes in indirect taxes consistent with the new GST regime. Overall, the changes in the tax structure are minimal. The changes announced are in the right direction. There are other features such as those relating to curbing black money, reforming the political funding system and expanding the use of digital payments. All these are welcome steps. Big corporates may not find any direct incentive for investment. If, however, the overall investment climate picks up because of higher growth, it will be of help. While there are possibilities of a cut in interest rate, the banks themselves are under stress. One should not expect too much. The Budget presented on Wednesday is a workman-like Budget. It is neither grandiose nor populist. It is well-intentioned. But the impact on growth and investment will depend on how effectively and speedily the various programmes are implemented. Equally important is how quickly the authorities normalise the situation and bring to an end the disruptions resulting from demonetisation.