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?

The Economic Times - - Front Page -

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.

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