The BJP’s backroom strategists will have to give their best to ensure that Parliament’s Budget session, beginning today (23 February), doesn’t turn out to be a repeat of winter and monsoon. There aren’t many, even within the BJP-camp, who carries high hopes of a productive budget session, when the Rohit Vemula suicide and the ongoing Jawaharlal Nehru University (JNU) imbroglio have re-energized the opposition to mount yet another attack on the Narendra Modi-government. There were enough hints of what is in the store in Tuesday’s all-party meet called by PM.
This is certainly no good news for the economy, which is still struggling on the ground, is desperate for fresh investments and has waited long for growth-oriented reforms such as the crucial Goods and Service Tax (GST) Bill. Ever since Modi assumed power in May 2014, hopes were flying high on fast-paced economic reforms that will elevate the economy to a high-growth path and provide more jobs to millions. Modi hasn’t had much luck so far.
His government gets so entangled in some or other political controversies just before every Parliament session start. If Vypam scam and Sushama Swaraj controversy spoiled the Monsoon session, intolerance debate did the job in winter and, this time around, the JNU mess is fresh enough to spoil the show. And without fail, the BJP’s motor mouths have given enough ammunition to the opposition to plan its moves.
Reforms process stuck
The Congress party doesn’t seem to be on a consensus path yet on GST with respect to their three demands (mainly the inclusion of 18 percent GST rate cap in the Bill), which would mean that the BJP will have to struggle in Rajya Sabha, where its numbers are still weak, to push the crucial piece of legislation.
“The prime minister should take the opposition into confidence and see to it that the House functions smoothly and effectively,” Congress MP and chairman, Public Accounts Committee, KV Thomas recently told Firstpost. “If the PM thinks he can do without the cooperation of the opposition, let him go ahead and get the bills passed,” That doesn’t sound a very promising stance for the Budget session.
There hasn’t been any major progress on large-ticket reforms yet, mainly the GST and banking sector reforms, even though the government has managed to push small reforms steps in the area of foreign direct investment, subsidy rationalisation and attracting foreign entrepreneurs to build factories in India through initiatives such as ‘Make In India’ and ‘Start-Up India’.
But, the major challenge still remains on getting private investments to expedite the manufacturing growth. So far, the private sector has remained on the sidelines and public funding has acted as the key driver to growth.
As the Budget session nears, Modi is facing more skeptics than before and a weak economic scenario being questioned by more people than ever before, despite the 7.6 percent GDP growth projected for current fiscal year.
It was almost certain that GST will miss the 1 April roll out deadline when the GST Bill didn’t happen in the Winter Session. With chances of this happening in the Budget session too looking difficult, uncertainty will increase on this key piece of legislation (designed to subsume several taxes into one) critical to give a leg up to the economy.
Still, there is a better chance of bankruptcy code happening since this was introduced in previous session as a money bill. Investors will eagerly look at the Budget for any roadmap for the reforms path from this point. “Markets keep a close eye on the progress of the reform agenda ahead of five key state elections that are likely to be held in April-May,” said Radhika Rao, economist at Singapore-based DBS Bank.
There is a visible decline in fresh investments in the economy. In the first nine months of FY16, total private investments in the country declined to Rs 3.5 lakh crore compared with Rs 4 lakh crore in the corresponding period last year, while investments by the government declined to Rs 1.9 lakh crore as against from Rs 3.98 lakh crore.
The total number of investment proposals for the first 8 months of the year was higher at 1,366 during FY16 compared with 1,074 during the same period of last year. However, in value terms the proposed investment was lower at Rs 2.02 lakh crore as against Rs 3.22 lakh crore during the same period of last year.
As noted before, if one discounts the sharp, unconvincing, jump in the manufacturing segment, growth has largely happened due to urban consumption, whereas rural growth, exports (which have fallen for 14 consecutive months) and fresh capital investments (also shown in the gross fixed capital formation numbers that fell to 27.8 per cent of GDP in Q3 from 30.5 per cent in Q2 and 30.9 per cent in Q1) have been weak.
The budget math
Beyond the reforms agenda, the budget itself will be a more complicated exercise this time for two reasons:
One, there is a big challenge of dealing with the bank recapitalisation issue since the bad loans have spiked beyond all estimates (the gross NPAs of banks crossed Rs 4 lakh crore in December) and resulting in more capital requirement for banks to provide for bad assets. Banks also have an equal chunk of restructured loans on their balance sheets, which could turn bad eventually if the economy doesn’t pick up well.
Though it is good that banks' hidden rot is finally coming out, in turn, this would make allocation of capital to state-run banks a complex process for finance minister Arun Jaitley since banks will need much more funds to set aside bad loans.
So far, Jaitley has allocated Rs 70,000 crore for state-run banks and has asked them to find funds from the market for about Rs 1.1 lakh crore. The consensus estimate of capital these banks would require in the year to 2019 is at least Rs 2.4 lakh crore when the Basel-III norms will take effect.
If the budget fails to give a convincing roadmap on how the government plans to address the bank recapitalisation issue and how it wants to take ahead the privatization process of government banks, it can act as a major turn off for investors and rating agencies.
Two, the big question is will the government choose to stick to the fiscal consolidation path or relax the roadmap to make room for more public spending. The RBI has already warned against the second option. One needs to wait and see what Jaitley choose to do.
The government has committed to bring down the fiscal deficit to 3.9 percent this fiscal year, 3.5 in next fiscal year and 3 per cent by fiscal year 2018. But, in the wake of higher wage bill in 2016-17 (on account of 7th pay commission implementation) and low growth, the government may not be in a position to meet this target. The only way to achieve this is to drastically cut short the fiscal spending, which can damage the economic recovery.
“Public investment has driven the country’s economic recovery in the past 18 months, and this will likely be curtailed to achieve this reduction. With private-sector investment unlikely to come to fruition soon, we believe the nascent recovery may suffer serious setbacks,” said Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered Bank, in a note.
After two washed out Parliament sessions, it is important for the Modi-government to make sure that the Budget session doesn’t turn out to be a flop show, in the context of weak economy and investor skepticism. The task is even more difficult now in the backdrop of ongoing JNU mess.
Data support from Kishor Kadam