23 Feb 2016 20:39 IST

Influence of global, domestic factors

Chinese slowdown, crude oil prices may impact growth

The Union Budget this year will be greatly influenced by developments in the global economy, the growth of which is put at 3-3.5 per cent, according to the IMF and the World Bank.

Crude oil

The first development is the sharp fall in crude oil prices to levels that are unsustainable in the medium term. Though our crude oil import bill has decreased, the government’s investments in renewable and cleaner technologies may convert into bad debts. The Government can issue green bonds to mitigate this threat to renewable energy investment in the short run.

China’s economy

The second reason is the slowdown of the Chinese economy due to several reasons, such as recalibration of the renminbi, and push towards local consumption in that country. This may lead to falling Chinese exports, resulting in an upward push in prices of manufactured goods in the short term.

Stricter immigration policies

The third global development is stricter visa and immigration policies of developed countries, in the context of the massive immigration crisis. This will impact remittances into India and, in turn, the balance of payments. The government should attract NRIs to invest more in the country to shore up the dwindling forex inflows.

Non-performing assets

On the domestic front, the first issue is with asset quality and the non-performing assets (NPA) of public sector banks. During the recently conducted World Economic Forum Summit, Arun Jaitley said financial provisions would be made to address this issue. There are huge repayment related issues with some big corporates. Recovering this money will go a long way in bringing down the cost of capital for small industries and retail consumers.

Exports to developed countries

The second important issue to be addressed is the potential decrease in exports to developed countries. This may cause a dip in the foreign exchange the economy earns in the short term. There is a need to look for other growth centres in Africa and Central Asia, while making our goods more competitive under the Make in India mission. The Smart Cities initiative should implement the idea of integrated cities. This will promote long-term investments in the country.

Pay Commission

The third issue deals with the commitments made in the Seventh Pay Commission, which will have to be fulfilled in a phased manner starting this fiscal. This will be an added burden on the national exchequer. Expenditures in the social sector like the public health system ( Indradhanushya scheme), Start-up India, Swachh Bharat, and Digital India will require an initial stimulus from the Budget. The returns will flow in only in the medium term.

The introduction of the GST in the next financial year will not yield immediate short-term results, but will lay the ground for a sustainable growth path for the medium and long term.

The writer is doing his PGP 2nd year at IIM Ahmedabad.