Union Budget 2017-18 has come at a very critical time for India. One of the largest shocks to the economy preceded it. From an economy which was doing well, growing according to official figures at about 7 percent, it has suddenly plummeted into a crisis with unemployment rising, investment falling, banking in trouble and so on. The budget was an opportunity to tackle this recessionary condition of the economy. Once an economy enters a recessionary phase, it cannot come out of it on its own. Private investment was falling even before November 2016 and has fallen further since then due to a decline in demand and fall in profitability. The unorganized sector was particularly badly hit immediately while the organized sector followed suit with a lag.
It was expected that the budget coming at this critical juncture would do something to help the economy to arrest the decline being experienced and cushion the ill effects on the economy and especially the unorganized sectors.
The Union budget 2017-18 does little of that. The expenditures are slated to go up from Rs.20.14 lakh crores (RE) to Rs.21.47 lakh crores, that is an increase of Rs.1.33 lakh crores or about 6.5 percent. This is hardly the stimulus to the economy that could help reverse the prevailing recessionary conditions.
The Budget assumes a growth rate of 11.75 percent in GDP in 2017-18. How is this estimated given that the Economic Survey itself said that the growth rate will fall but the effect of the fall in the informal sector cannot be taken into account at this time? Assuming that the rate of growth of the economy falls by 2 percent in the full year, from 7 percent to 5 percent then it implies that the economy is growing at close to zero percent in the period after November 2016. Projection for the next year has to be on this base rather than on the base of what happened before November 2016. Those conditions are not prevailing at present so that one cannot assume that they will suddenly reappear. Post November 2016, many irreversibilities have come into play and they need to be taken account of. The Budget itself does not do much to revive the economy. If revival was attempted, the conditions that prevailed before November 2016 could have become relevant for calculations but in the present situation that is not the case.
If any projection is to be done it should be on the basis of the post November 2016 conditions, i.e., a zero or negative rate of growth. The price rise according to the government it likely to be in the range of 4 to 5 percent so that the nominal GDP can at best rise by around 4 percent and not 11.75 percent as assumed in the budget.
The implication is that gross tax collection assumed in the budget to increase by Rs.2.08 lakh crore over the revised estimates (12 percent) will not be achieved. The Revised Estimate over the Budget Estimate for 2016-17 itself is substantially higher by Rs.0.73 lakh crores (4.6 percent). Thus the increase over the previous year (2015-16) works out to a whopping Rs.2.47 lakh crore (17 percent). Given the slowdown in the economy after November 2016, this figure is unlikely to be achieved? Is this a wishful assumption?
The difficulty is compounded by the fact that the budget was preponed by a month so it was planned on the basis of data that was available only up to November 2016. Thus, it is very likely that the post November figures have not been factored in. Both the Chief Statistician of the Government and the Chief Economist have said that the effect of demonetization on the GDP cannot be calculated as yet.
The Economic Survey and the budget speech both stated that demonetization has had an effect on economic activity but it is not mentioned how much the impact will be. Then, how can the budget be formulated? Its calculations are likely to go wrong.
Surveys of industry and trade that have been done recently suggest that there has been a sharp contraction in the economy. Wholesale markets in different parts of the country that this author has visited in the last few months still report a fall in turnover by 20 to 30 percent over the normal situation. There has been a sharp break in the economy and that needs to be taken into account but the budget fails to do that. Government is possibly aware of this situation but does not wish to admit it. So, without data being available and without the correct assumptions being made, the budget hides more than it reveals.
In brief, the budget then is in a trap. It assumes that the economy is back to usual (or will shortly do so) so does not take steps to deal with the grave situation facing the economy. For the same reason, it does not base its calculations on the correct data and that would mean that the budgetary calculations will go wrong and that will damage the economy further.
The Budget and the Economic Survey have both weighed in favour of a fiscally prudent stance. They have talked about keeping the Fiscal Deficit down to about 3 percent (a little bit this way or that) of GDP. So, if the revenue projections turn out to be incorrect due to the wrong assumption about the rate of growth of GDP, then if the deficit targets have to be adhered to, the only thing that could happen is that expenditures would have to be lowered.
Usually when budgetary expenditures are cut, the axe falls on capital account and social sectors – what are called the soft areas. This would mean that whatever little stimulus is planned in the budget, even that would not materialize. The promises about giving to the farmers, poor and so on would not be fulfilled at the end of the year.
The budget has also given tax concessions to the lower middle classes (those earning up to Rs.5 lakh per annum) and the small and medium businesses (with turnover of up to Rs.50 crore). The idea is to give a boost to consumption of those classes that are hurt by demonetization and to boost the profit of the small sector that is adversely affected. This would reduce the tax base of the economy but would not help revive demand since the fall in demand and profitability is far sharper than the amount of the stimulus.
A 2 percent decline in the growth rate of the economy would amount to a loss of Rs.3 lakh crore of output while the total stimulus is the taxes forgone, which according to the budget is only Rs.22,000 crores – totally inadequate to compensate the fall in demand or the loss of profitability of the SMEs.
The budget can be said to hide more than it reveals. It is framed assuming business as usual – something that is not true post November 2016. This is a fatal mistake. It has resulted in incorrect assumptions about revenues for the year 2016-17 and even more so for the coming year 2017-18. As a result either the planned expenditures or the fiscal deficit targets or both will not be met. Consequently, the budget does little to mitigate the crisis in the economy with production, employment, investment all adversely affected. The private sector will not invest more since it faces low capacity utilization and decline in profits while the government is not stepping up its investments to compensate for that. The budget ought to have been a `crisis’ budget and should have done a lot more. It would be apt to say, while Rome burnt, Nero fiddled.
(The writer is retired Professor of Economics, Jawaharlal Nehru University. He is author of ‘Understanding the Black Economy’)
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Published Date: Feb 02, 2017 03:55 pm | Updated Date: Feb 02, 2017 03:55 pm