When the Finance Minister Arun Jaitley unveils the budget on 1 February, he will do so in the knowledge that economic activity has been disrupted and confidence has been dented. Thus, what would otherwise have been a run-of-the-mill budget, will now have to be one of the most important budgets presented by the current government, thanks to the currency swap (popularly referred to as demonetisation).
The backdrop couldn’t have been more interesting. The global environment remains uncertain with uninspiring growth prospects, tepid global trade and increased political and economic challenges to globalisation. Back home, state elections including that in UP, the largest state, also make for an interesting setting. So what should the budget be judged on?
The following 5 Cs will be important:
Confidence: There has been a dislocation of economic activity and both the Central Statistical Organisation (CSO) and the Reserve Bank of India (RBI) have revised growth estimates downwards from 7.6 percent to 7.1 percent -- a Rs 75,000 crore markdown in FY-17 GDP. Moreover, consumer and investment sentiment has been dented too. The onus will be on the budget to jump start economic growth and revive sentiment through bold and innovative measures.
Competitiveness: In a rapidly realigning and more inward-looking world, the budget must act on imparting competitive edge to the economy through:
• GST: Even in its present less-than-ideal form, the GST is a big gamechanger and the government must bring it back to the fore giving adequate time and clarifications to the stakeholders so as to not cause a disruption to business and economic activity. This remains key to enhancing India’s competitiveness
• Taxation: Corporate tax rate needs to be lowered to make Indian industry more competitive from medium to long-term given a probable sharp drop in US tax rates and also the finance ministry's existing road map of corporate tax reduction. The Finance Minister can also look at transformative change in direct taxation with a cut in direct taxes along with the abolition of a plethora of exemptions to complement the radical overhaul of indirect tax.
• Ease of doing business: The government will have to further its efforts towards improving India’s standing in the ease of doing business where in the World Bank’s latest ‘Doing Business’ report, India’s place remained unchanged from last year’s original ranking of 130 among the 190 economies. It will also have to focus on factor reforms such as Land & Labour and also on long pending overhaul of government administrative machinery.
Credit cycle: Economic growth cannot be sustained unless there is revival of the credit cycle in the system. Credit growth remains at all-time low levels even as banks are flush with deposits. However, with bank as well as corporate balance sheets still broken, the most important tasks will be to restart the credit cycle by addressing the issue of bank capital and stressed assets/ NPAs.
Consumption and Capex: This has been a key driver of growth in India. However, cash crunch has impacted various consumption pockets to varying degrees. The government may do well to contemplate innovative ideas to boost rural as well as urban consumption through a combination of directed measures, tax cuts and wealth transfer to induce behavioral change, using some of the gains from the demonetization drive. In the absence of private capital expenditure (capex), there has to be a visible and unequivocal push through public spending through creation of productive assets including on hard infrastructure such as Roads, Railways and Defence and even on soft infrastructure such as Health and Education where India continues to lag its peers.
Credibility: Indian budgets are often shots in the dark. Revenue is consistently overestimated whereas expenditure is consistently underestimated. Moreover, there is often a drifting away from fiscal strategies for the medium term. This time around, a committee headed by N K Singh is expected to submit its review of the FRBM Act and may suggest a 'moving deficit target'’ or a 'fiscal deficit range' instead of a point target of 3 percent of GDP for FY-18, since India has moved to inflation target range.
It is important to see what are the key assumptions underlying the budget especially on GDP growth. The first advance estimates (usually used as inputs for budget projections) have not factored in the effects of demonetisation on overall GDP growth.
Secondly, it will be important to observe what changes are made to the revenue side as postponement of GST may entail changes to excise and service tax rates at least for half of the coming year. Also, the government is likely to miss its FY-17 disinvestment target, the seventh year running and the 17th time in the 26-year history of disinvestment.
Thirdly, on the expenditure side, the Railway budget will become a part of the overall budget which is a positive step. Importantly, the budget is likely to do away with the tricky issue of demarcations of the out-dated Plan and non-Plan items. It will be important to see if the government re-defines the definitions of what constitutes capital expenditure versus what constitutes revenue account. The treatment of social infrastructure also will be important. The government should come out with like to like comparable set of numbers so as to avoid confusion.
(The writer is chief economist, the Mahindra Group)
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Published Date: Jan 17, 2017 10:53 AM | Updated Date: Jan 17, 2017 14:53 PM