Arun Jaitley presented the government’s fourth budget, and if there is one theme that ran through the policy document, it is that of continuity. Coming soon after a move as disruptive as demonetisation, the budgetary expectations were similar. However, the Budget proved to be a conservative one with an attempt to maintain a sense of continuity in government policies. The nature of consistency, although commendable and necessary on many fronts, proves to be inimical to the country’s interests in other aspects. The hits and misses of the Budget 2017 show why that is true.
The first aspect where the government has rightfully maintained its stance is in the domain of black money. It has taken the fight against corruption to its very root by targeting political funding. The maximum amount of funding that parties can receive in cash has been reduced to Rs 2,000, and the RBI Act is proposed to be amended for the issuance of electoral bonds. Apart from political funding, cases of big-time economic offenders that flee the country were also addressed with a proposal for a new law to confiscate their assets till they submit to the jurisdiction of the appropriate legal forum. Finally, cash transactions, in general, have been limited to Rs 3 lakh. Since demonetisation was an attack on the stock of black money, these steps were necessary to take it a step further and target its flow in the economy.
Secondly, a similar continuity in the government’s stand was seen towards fiscal consolidation. Despite calls for a splurge in public expenditure and move to a counter-cyclical fiscal model, the Budget avoided any deviation from the FRBM Committee recommendations. It pegged the fiscal deficit for 2017-18 at 3.2 percent of GDP and is committed to achieving 3 percent in the following year. This should send a positive signal to the credit rating agencies and attract funds from abroad, which are urgently required in India’s investment-starved economy.
The third aspect was the Budget’s continued focus on improving the “ease of doing business.” A much-needed simplification in the FDI policy was brought about with the abolition of the two-decade old Foreign Investment Promotion Board (FIPB). This should fast-track the timelines for foreign investment that were coming in through the approval route and also simplify M&A procedures. A higher foreign investment will also compensate for the sluggish investment sentiment running through the country.
Fourth, the government maintained a firm belief in the fiscal route to stimulate investment demand and “crowd in” private money. Infrastructure spending was given a boost of about 10 percent since the previous budget. A significant allocation of almost Rs 4 lakh crore was allocated to the sector. The stimulus given by a rise in public expenditure was necessary for the current year when growth was projected to be slow.
There were a few other positives in the Budget in its gradual nudge towards digitalisation. Tax incentives were announced in the use of cashless transaction in PoS. Such steps will encourage higher formalisation of the economy. There were a few positive steps towards ensuring affordable housing as well. A housing coverage of 1 crore was promised under the Housing for All scheme.
However, the government’s continued policy stance on some aspects have left the Budget short of the positive impact it could have generated. One aspect that was completely overlooked was that of private investment. According to the CMIE database, projects under implementation have been stalled for the last five years. Sluggish private investments have become a worrying factor, and since they account for two-thirds of the country’s total investment activity, their urgent revival is imperative. It was all the more important to be acted upon in this Budget because economic growth is expected to be slow and the government is constrained by the FRBM recommendations to use the fiscal route to recovery.
A boost to private investment could have been achieved with a higher budgetary focus on reduction of stressed assets. According to the Financial Stability Report released in December 2016, NPAs have dramatically jumped from 7.8 percent of the advances in March to 9.1 percent in September. Due to the problem of rising stressed assets, over-leveraged banks have become risk averse and thus curtailed their lending practices. To deal with the problem, the Budget has, in fact, allocated ₹10,000 crores to recapitalise the banks in 2017-18. However, the strategy has failed to improve the situation in the past. The government needs to take the Economic Survey’s recommendation of the establishment of a Public Sector Asset Rehabilitation Agency or a similar institute that tackles the problem of stalled infrastructure projects, which are a leading cause of rising stressed assets. There is an urgent need to tackle the problem of NPAs head-on before the situation festers and stalls the overall economy in the process.
A second consistent miss in the Budget was in the education and health sectors. In the first full-fledged budget of the current government, education and health saw cuts of 16 percent and 15 percent respectively. In fact, the sectors have hardly ever received budgetary attention, making India one of the lowest spenders on these two fronts. In the latest budget, as well, the two sectors were merely paid a lip service. A few initiatives within the sector were taken up, but substantiated policy actions to improve the quality and reach of the institutions within the sector were lacking. It is high time the Indian government perceives such budgetary allocations as an investment rather than a cost to the exchequer.
Put simply; the Budget was a mixed bag. There were commendable initiatives on a few fronts, especially on that of black money. On the aspects where the Budget has left the country wanting for more, should be the next focus on the government’s action plan. Muted private investments and the burden of NPAs is hurting the economy where it matters; its growth rate. Moreover, stalled projects and the lack of enthusiasm in setting up a new one will also start impacting job creation. In the long run, the lack of investment in health and education will also have a staggering impact on the economy. These matters need immediate redressal, and it is hoped that they receive appropriate attention.
(Amit Kapoor is chair, Institute for Competitiveness, India and can be contacted at email@example.com and he tweets @kautiliya. Chirag Yadav is researcher with Institute for Competitiveness, India.)
Published Date: Feb 02, 2017 17:42 PM | Updated Date: Feb 02, 2017 17:43 PM