WALKING A TIGHTROPE
Finance Minister Arun Jaitley will present the last full Budget of this government on February 1. Next year, there will be a vote on account before the General elections (assuming the elections are not advanced to this year-end or early next year). What is he likely to do? What kind of a Budget can we expect? Let us first take a look at the state of the economy that forms the backdrop of this Budget. The Central Statistics Office (CSO) advance estimates for the full year show that the worst of the slowdown might well be over for the economy. After touching a low of 5.7 per cent growth in the first quarter and then recovering to 6.3 per cent in the second quarter, the CSO expects the GDP growth for the remaining two quarters to average 7 per cent, so that the full year’s growth comes in at 6.5 per cent. Almost all economists say that the worst disruptions caused by demonetisation in 2016-end and the introduction of the Goods and Services Tax (GST) on July 1 of 2017 are now behind us. The Index of Industrial Production has looked up in the past two months, and even the Purchasing Managers Index for manufacturing shows an uptick. Exports are picking up (though a lot of it is because of higher prices of oil). There is a general expectation that both manufacturing and services will do better from now on. Agriculture should post a decent growth for the year, given that the rains have been near-normal for the second year in a row. Consumption in some industries – automobiles, fast-moving consumer goods and consumer durables have moved up sharply.
Those are the good news. But there is also bad news. Crude oil prices have been hitting new highs, and if they stay over $70 a barrel, it will wreck havoc on government finances. GST may be settling down, but the indirect tax collections have been lower than expectations and will probably be much under the target set by the government for the year. Consumer price inflation is up once again, led by a surge in food prices, and that could mean that there will be no interest rate cuts by the Reserve Bank of India in the rest of the year at least. Rates might even go up, say some analysts. Despite the second consecutive year of good monsoons, agricultural distress is at a high and rural incomes have stagnated or even fallen in some parts of the country. Many economists say that given the past pattern, we should prepare for a year of bad monsoons after two good ones. Private investment shows no signs of picking up. Because of lower revenue collections, the fiscal deficit target of 3.2 per cent this year looks difficult to achieve. And trade deficit is growing. Finally, job creation has been slower than what is required.
The finance minister does not have much choice when he stands up to present the Budget in the Parliament. He will need to announce measures that can help agricultural growth and also job creation. So he cannot cut expenditure – he might well have to increase it. He can hope that GST revenues will finally grow as per expectations, but he cannot count on it. So, he has to find newer avenues of revenue generation if he wants to stick to a path of fiscal prudence. And he needs to create conducive conditions for growth despite the many challenges he faces. Expect some tightrope walk from him – and perhaps some innovative ideas – in this year’s Budget.