For Finance minister, Arun Jaitley, the 2016 Union Budget will be the biggest challenge he has ever handled in finance ministry so far. Jaitley has had more critics than admirers ever since he took over the finance portfolio in the Narendra Modi-government.
The lawyer-turned-politician is faced with task of convincing sceptic investor that his money is still safe in this country. Already foreign investors are on an exodus mode with portfolio outflows down by cumulative $2 billion so far this year, a fifth last year’s total flows, according to a report by DBS Bank.
A budget that lacks bold reforms and promise of big spending boost can further turn off global investors and, thus, widen the trust-deficit on the Modi government. To convince the investor, Jaitley needs to show that government is well under control of its finances and has the intent to stimulate growth by pushing public spending and fast-tracking the reforms process (tax, land and banking).
But, achieving this balance is even more difficult for Jaitley now for both political and economic reasons.
For one, the budget session holds no promise of productivity in the backdrop of an agitating opposition on various issues JNU row, Jat agitation and Rohit Vemula suicide issue. The Congress party, the main opposition, has already given a battle call. If other opposition parties too join the protest, there aren’t many chances for Prime Minister, Narendra Modi, to take ahead the reforms process in Budget Session.
In particular, the fate of crucial Goods and Services Tax (GST) hangs in balance in the backdrop of this government projecting the 1 April deadline for long. If GST doesn’t get passed in the budget Session, it is sure to miss the 1 April deadline. The bankruptcy code can happen since that was introduced in Lok Sabha as a money bill.
Secondly, a key challenge for Jaitley is how to outline the government’s intent and roadmap to deal with the public sector banks (PSBs) neck-deep in bad debts, huge capital requirement and eroding market capitalization. The total bad loans of state-run banks (gross non-performing assets in technical parlance), at Rs 4,00,000 crore at end December, has exceeded their total market capitalization of these banks. The March, 2017 deadline by RBI for banks to clean up their balance sheets, has opened a Pandora’s box in the banking industry, since much dirt will now emerge from bank balance sheets. This would require a great deal of additional capital for banks since for every Rs 100 rupee that turns bad, they need to set aside Rs 15 rupee as provisions. Total provisions made on bad loans by banks in the December quarter alone stood at Rs 49,604 crore as compared with Rs 23,904 crore in the corresponding period last year.
This means that the government will have to infuse a significantly higher chunk of capital in these banks in the approaching years as against what they have promised already (Rs 70,000 crore). A capital starved government will find it extremely difficult to feed these banks eventually forcing it merge some of the banks and sell off a few others. Presently, the government holds over 70 per cent stake in at least 13 banks. Clearly, government’s ‘Indrdhanush’ package hasn’t changed life much for state-run banks so far. Its time for this government to go for radical reforms steps and lay out a clear agenda on the privatization of at least a few state-run banks. On these reforms-steps, investors will look for cues in the budget.
In the wake of higher spending required for next fiscal year (implementation of a 23.6 percent rise in 7th pay commission, OROP), lower-than-expected nominal GDP growth and poor show on the disinvestment-front, managing the fiscal consolidation roadmap (already delayed by one year), will be difficult for Jaitley as he will miss the targets in percentage terms (3.9 per cent in fiscal year 2016, 3.5 percent in fiscal year2017 and 3 percent by 2018). Jaitley will be forced to relax the deficit target. “The pace of fiscal tightening is likely to slow in FY16/17, with the deficit target to be adjusted higher at -3.7% of GDP (vs roadmap’s -3.5%), given the need to accommodate higher spending commitments, especially a bigger public sector wage/pension bill and rising banks’ recapitalization needs,” said Radhika Rao, chief economist at Singapore-based DBS Bank.
The biggest question for Jaitley, is whether to cut down spending and appease the global rating agencies with a healthy balance sheet or give the fiscal consolidation agenda a slip by making room for more fresh investments. The option to cut spending drastically to adhere to the fiscal roadmap isn’t a wise option at this stage when growth is facing serious challenges. That’s a mistake which P
Chidambaram did in the later years of UPA-II. Jaitley should, instead, shore up the revenue channels and boosting exchequer through better tax collections and aggressive divestments. Jaitley shouldn’t be obsessed with the fiscal deficit figure alone as happened in the UPA regime, where sharp spending cuts were done even when the economy was reeling under economic slowdown, thus worsening the problem.
But, this doesn’t mean the government should target unachievable disinvestment figures as it did in the previous years, when it has fallen well short of the target in successive years. The government has so far raised Rs 13,391 croe amount this fiscal year through this route, compared with a target of Rs 70,000 through. Jaitley should refrain from giving too high a target for him to achieve else he would run the risk of facing backlash from investors and rating agencies.
The short point is its time for the NDA-government to aggressively push spending to spur growth, even if it means overshooting the fiscal deficit targets and even though it would mean the wrath from rating agencies and RBI (which has already warned the government on growth driven by fiscal deficit). The fact is that there isn’t really a choice to get the economy back on the growth path. Most economists agree that the 7.6 per cent growth projected at this stage is a mirage. Jaitley’s task is to revive the animal spirits in the economy and boosting the investor confidence. Only a bold, reformist budget can silence his critics.
Data from Kishor Kadam