But Do These Numbers Add Up?
Now that the brouhaha over Budget 2017 is all but over, all eyes shift to Urjit Patel and the Reserve Bank of India’s (RBI) monetary policy announcement this Wednesday. The statement following the Budget is always of special interest as it is read as a signal of whether the government and RBI see eye to eye on broad macroeconomic assumptions underlying Budget numbers.
Much, therefore, depends on the credibility of the Budget numbers. Finance minister Arun Jaitley has apparently been fairly restrained: deviation from the fiscal deficit target is relatively small at 0.2 percentage points. So should the RBI supplement his efforts with a monetary stimulus? In layman terms, should the Monetary Policy Committee (MPC) cut interest rates? Or should it take the view that monetary policy is already easy and opt, instead, to wait for greater clarity?
There are no easy answers. Not only because most banks have already reduced interest rates by more than the reduction in the RBI’s repo rate since January 2015. But, more importantly, because the fiscal arithmetic underlying Budget 2017 is not entirely credible. Consider the numbers on which the finance minister has pulled off the impossible. He exceeded his revenue targets and overshot projected expenditure, and yet managed to adhere to the fiscal deficit target of 3.5% of GDP. All in a year when economic activity was majorly disrupted, post-November 8, 2016!
Let’s start with GDP estimates for fiscal 2017-18. These have been projected at .₹ 168.47 lakh crore, assuming 11.75% growth over revised estimates for 2016-17. But wait a minute. The Central Statistical Organisation (CSO), responsible for providing GDP estimates, has not put out revised estimates for 2016-17. All we have from the CSO are first advance estimates for 2016-17 GDP, published on January 6, 2016.
So, from where has the finance minister got revised estimates for 201617? “The Economic Survey,” said senior government officials, in a postBudget television interaction on ET Now. But here’s the thing. Measurement of GDP is a complex statistical exercise. That is why it is entrusted to a specialised, technical body in every country, including India.
This year, since the presentation of the Budget was advanced by a month, the CSO also published its GDP estimates earlier, on January 6, 2017. However, it had a caveat: demonetisation had not been factored in as it did not have enough data to make a proper estimate.
So what is the sanctity of 2016-17 GDP estimates, which form the basis for 2017-18 GDP projections and, flowing from that, for tax collections, expenditure and so on? We do not know. The Economic Survey made a brave attempt to factor in the demonetisation impact. But can we accept its GDP estimates without question?
What we do know is that if we take the Survey’s nominal GDP estimates for 2016-17 and the CSO’s first revised estimates for 2015-16, we get a nominal GDP growth of just 10.2% for 2016-17, not 11%, as assumed in the Budget. Taking the CSO’s implicit GDP deflator of 1.25 for the year, the real GDP growth in 2016-17 falls to 6.2%, well below most estimates.
That is not all. Revised estimates, for corporation tax and personal income tax for 2016-17, are exactly the same as Budget estimates. Why? Because, hold your breath, government officials say they don’t have reliable numbers for direct tax collections as yet. So, Budget estimates have simply been repeated as revised esti- mates. Yet, it is based on such numbers that we are commending the finance minister for sticking to his fiscal deficit target of 3.5%. And provide the basis for projections in Budget 2017.
There is similar unease with indirect tax collection numbers, given uncertainties over the goods and services tax (GST). So, here again, estimates must be taken with a pinch of salt, especially when we juxtapose a slowing economy with the short-term economic disruption likely on account of GST. Likewise, going by the track record of successive governments, the disinvestment target of .₹ 72,500 crore for 2017-18 seems wishful thinking.
On the expenditure side too, some numbers do not carry conviction. Thus, despite the FM’s talk of increased capital expenditure, it is up only about 11%, not 25% (this is possibly on account of reclassification).
So, how is the MPC to read the signals from Budget 2017? Agreed, it is a Herculean task to draw up a credible Budget for an economy of the size and complexity of India. Also, doubts about fiscal arithmetic are not new.
But when there is the additional handicap of lack of credible data — due to early presentation of the Budget, however desirable that might be — combined with economic disruption, the fiscal arithmetic becomes more suspect. If the MPC was hoping the Budget would help it see through the smoke and mirrors of demonetisation, it is in for a disappointment.
‘Never make a forecast, especially about the future’, quipped Yogi Berra, the baseball coach. Policymakers don’t have that luxury. They have to make that leap of faith. But when macro numbers lack a sound underpinning, as in Budget 2017, the outcome could be costly. In such a scenario, the MPC is best advised to play safe for now and wait for greater clarity.
In search of some clarity