The Finance Minister had a challenging task in his fourth edition of the Union Budget. There were three major structural reforms in the exercise: the change of date to February 1, so that the proposals can be implemented as the new financial year begins; consolidation of the Railway Budget with the General Budget to save time and energy; and discontinuation of the splitting of expenditure under Plan and Non-Plan heads, to ease resource allocation and monitoring.
Besides, the major tailwinds supporting India’s growth story in the last few years — low oil and commodity prices — are gradually turning into headwinds. According to the CSO estimates, private investment will decline by 0.2 per cent in FY17 because of the ‘festering twin balance-sheet problem’ of high corporate leverage and significant bad debts in the banking system.
Finally, the contentious demonetisation exercise aggravated the economic environment due to the potential impact on aggregate demand.
Rural thrust
Amid these a economic conditions, the Budget seeks to focus more on rebuilding Bharat instead of India. The underlying theme is indicative of redistribution of wealth and a transition towards empowerment from entitlement. The Budget is commendable for its adherence to the fiscal consolidation roadmap, impetus to the rural and agrarian sectors and significant push to infrastructure.
The FRBM review committee had suggested a move towards a sustainable debt-to-GDP target of 60 per cent by 2023 as the major anchor for the government’s fiscal arithmetic. It recommended an operational target of achieving 3 per cent fiscal deficit for the next three years along with ‘escape clauses’ for variation to the extent of 0.5 per cent beyond the target. Mr Jaitley chose to go with the fiscal deficit target of 3.2 per cent, given the sluggish private investment, increasing global political uncertainty and potential capital outflows due to global interest rate changes.
Fiscal discipline
The intent is to increase the government’s capital expenditure while ensuring that its net market borrowings are lower than the previous fiscal. Most notable is the bid to improve the quality of deficit. The revenue deficit target for FY18 has been set at 1.9 per cent of GDP whereas the FRBM roadmap suggested a 2 per cent target. The bottomline is that the adherence to fiscal prudence amidst increasing expectations of a populist Budget will have a favourable impact on the perceptions of investors and credit-rating agencies.
The Budget is certainly targeted at the bottom of the pyramid, making it an inclusive exercise. This was much needed owing to fears of slowing rural demand as an implication of demonetisation. Budgetary allocation to the rural and agricultural sectors has seen a staggering increase of 11.7 per cent, while the MGNREGS got an increased allocation of ₹48,000 crore.
Initiatives have been taken to improve the income security of farmers by enlarging the scope of the crop insurance scheme. The credit target for agriculture has been raised to ₹10 lakh crores.
In the absence of direct job creation policies for the 12 million people entering the labour market every year, the Budget provides a fiscal stimulus package for labour-intensive sectors such as leather and footwear. The objective, as the Finance Minister said, is to lift 10 million households above the poverty line by 2019. These steps will help revive rural consumption demand and provide employment to those rendered jobless in the rural areas post the note-ban.
Easing tax pressures
For the urban lower-middle class, the government has sought to ease tax pressures by reducing the tax rate for the lowest slab from 10 per cent to 5 per cent. The intent is to address the abysmal tax compliance in India and thereby increase the tax base. Besides, the MSME sector which was adversely affected by the currency swap, will now have to pay a lower corporate tax if a unit’s turnover is less than ₹50 crore. Some 96 per cent of all tax-paying companies will benefit from the lower tax rate, intended to improve private investment by the MSME sector.
The infrastructure sector received a 25 per cent increase in budgetary allocation. This is the first Budget that talks about multi-modal transport planning to achieve synergies from escalated investments in coastal connectivity, logistics, construction, irrigation and development of airports in Tier II cities through public-private partnerships.
Affordable housing has been accorded infrastructure status which would increase access to institutional funding at lower interest rates. Such housing will no longer be largesse by the government to the marginalised sections but will now become a marketable product.
Capacity utilisation in industry
The current capacity utilisation is 67 per cent across all sectors of India Inc. Given the excess capacity, any policy to artificially ramp up private investment would lead to capital inefficiency similar to that being faced by China. Notwithstanding the excess capacity, increased government spending will generate employment opportunities, raise consumption demand and crowd in private investments in the medium to long term.
In spite of the positive overtones in the Budget, it is important to appreciate that fiscal arithmetic is based on certain assumptions. First, the Budget assumes 11.75 per cent nominal GDP growth for FY18. This is very optimistic, compared with the 10.2 per cent expected growth in this year. Second, it may be difficult to realise the expected 12.7 per cent growth in net tax revenue given the risk of rising oil prices and the uncertain impact of GST in the first year. Third, given the track record of disinvestment so far, the current target is certainly ambitious.
Finally, the expected growth in revenue expenditure, at 6 per cent, is half of that in FY17. A possible overshooting of the revenue expenditure target can adversely impact the government’s ability to go ahead with the ambitious capital expenditure plans. Despite a commendable job, any drastic change in the aforementioned parameters can potentially derail Mr Jaitley’s plan to rebuild Bharat.