The Budget, which to be presented by the Government early next month, is set to have an out-of-the-box approach and spring surprises. Its fundamentals would be welfare and growth, to make it popular, if not populist
Development economics is likely to be the base of the Union Budget. It is likely to be achieved by reviving public investment through a higher fiscal deficit target. Recent figures by the Comptroller and Auditor-General of India suggests that even for 2016-2017, fiscal deficit would be 4.3 per cent against the provisional 3.9 per cent. The deficit would be Rs 53,146 crore higher than estimated in the Budget. The NK Singh panel found the Fiscal Responsibility and Budget Management Act, 2003, limit impractical.
The approach to the Budget would be pragmatic. It is evidenced by the Government’s announcement that it would not accept the recommendation of the Chief Ministers’ panel headed by Andhra Chief Minister Chandrababu Naidu. This means that the Government is not going to tax cash transactions without an intense discussion.
This was the least the Government could do after President Pranab Mukherjee’s repeated statements that demonetisation “has hit the economy”. The market, industry and the people in general need soft approach.
The reality is that the economy has slowed down, as various indices indicate. Investment demand, measured by gross capital formation contracted for three consecutive quarters at 1.9 per cent (Q4, 2015-16), 3.1 per cent (Q1 2016-17) and 5.9 per cent (Q2 2016-17). Exports had negative growth in 2015-2016 and almost zero growth in the current fiscal.
The Central Statistical Office (CSO) advance estimates for this year indicate that even private final consumption expenditure has slowed down. Even without demonetisation, the gross domestic product growth at 7.1 per cent is 0.5 per cent lower than 2015-16. Growth in bank credit fell to 6.6 per cent in November 2016 and cannot be ascribed to demonetisation. Overall, growth post November 8, according to the International Monetary Fund (IMF) would be 6.6 per cent.
The Government also has to reconsider expenses, stated to be over Rs 60 crore, on promoting digital money that has sent shivers down the banking system. Bank CEOs are concerned that their infrastructure and transaction costs are increasing.
levying higher charges may become inflationary. They are also concerned that over 60 per cent of the money that came due to demonetisation may flow out sooner. This would lead to a process of rise in interest rates to attract deposits.
The savings have been a key to the growth of Indian economy for the last 70 years. The increase in NPA during 2009-2014, total stated to be around Rs 12 lakh crore, has hit the banking sector hard.
The banks are groping over how to recover those large loans that have turned bad assets. The recent move of arresting 11 persons connected to IDBI loan sanctioned to liquor baron Vijay Mallya shows that the Government has taken a tough posture but it is not helping the banks get their money back.
A higher fiscal deficit, simply means borrowings to spur public investment, is easier said than done. The Centre for Monitoring Indian Economy (CMIE) says that by the end of 2014, Government project announcements rose to a high as Modi Government began its term on a promising note.
In December 2014, capital expenditure (capex) announcements by the Government rose 40.99 per cent to Rs 1.17 trillion. However, public capex announcements have fallen since then.
In September, Union Minister for Water Resources, River Development and Ganga Rejuvenation Uma Bharti reiterated commitments to spend Rs 77,595 crore on irrigation. Environmental clearances, however, held up 89 per cent of the projects.
Other issues include lack of funds and land acquisition problems in various sectors. Private sector capex announcements have risen. But these have been beset by lack of clearances, leading to a high proportion of stalled private projects. Various Government bodies have been slow in unclogging the private sector projects.
Tardiness has hit Government’s own projects in its thrust areas. It is said to be in a bureaucratic quagmire. The new Budget announcements may spur sentiments but the Government has to unshackle itself of the procedural grip.
A substantial fiscal stimulus is needed to turn the economy. Going beyond the three per cent fiscal deficit ceiling is desirable in a globally depressive scenario as US President Donald Trump quits Pacific trade pact and leads a protectionist —swadeshi US — economy, oil prices rise and trade sinks.
The Government is likely to come out with its own swadeshi agenda through stimulus to small and medium sector, a strong political plank for the Government and programmes for the rural and farm sectors. Swachcha Bharat is Rs 2,000 crore business and can generate one crore jobs. It has 30 per cent growth prospects.
Similar other programmes should be the key to generating domestic demand. Dependence on external market has to be reduced. It should combine an aggressive external marketing for selling beyond the traditional goods. The proposed Indian Space Research Organisation venture to launch 103 satellites from one rocket in February makes it a global player.
In reality, oil price hike is a revenue booster. Excise duty realisation on petroleum products is likely to increase by 90 per cent. The full benefit of the global cut in prices was not passed on to the consumers. The Budget, aiming for inclusive growth, is likely to roll out schemes for public and private sector investments.
The Government realises that the private sector is key to the growth as they can innovate ways to increase exports and trade in a tough global situation.
It also has to roll out schemes to boost private consumption expenditure through higher purchasing capability. That means a drastic tax cut. Even corporate are demanding that their income tax rates be cut to boost capital investment.
The Budget may also have some bitter doses. It may monetise land pool and natural wealth, more disinvestments (this year it has earned Rs 30,000 crore), widen tax net and plug loopholes to check tax leakages.
Railways, postal department and other public utility services would be asked to generate their own revenues. But it has also to ponder how to increase expenses on health, education and other people-oriented areas.
It is likely to stress on expenditure side reforms, inflation management and tax-GDP ratio. Overall, large expectation of soft Budget is limited. Generating funds is desirable, but not easy. But the Budget is set to have an out-of-box approach and spring surprises. Its fundamental would be welfare and growth to make it popular if not populist.
(The writer is a senior journalist)