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Budget 2018: Modi govt has a strong case to stick to fiscal roadmap; it should not opt for populist track

In a year that Indian economy is expected to turn around cyclically and structurally, the Budget has the potential to be the trigger of economy’s breakout into a higher growth orbit. It being the first Budget after GST implementation and last full Budget before 2019 general election further add to both expectations and potential of the Budget. After roll out of Goods and Services Tax (GST), we expect the Budget to be focussed on social and economic projects rather than any major tax change.

Our expectation from the Budget is three-fold:

Stimulus to job creation
: All major economies provide incentives in form of tax benefits for creation of additional jobs. Such provisions in India are complicated and fail to act as incentives for companies to increase hiring. While infrastructure outlays will boost employment, significant gains in job creation will need nudging the private sector to increase hiring. And even if the tax sops become effective incentive, private sector will not increase hiring unless labour laws are more flexible. Concerted focus on broad based increase in job creation will thus need multi-pronged approach.

Continued job creation will also need restructuring education system to keep the growing work force relevant in the changing work environment. It would thus also require enhanced outlay and /or tax support to education sector. Actual public expenditure for education has been around 4 percent of the gross domestic product (GDP) despite recommendations for at least 6 percent and it needs to increase rather quickly. In view of the fast-changing work place requirements, there is an urgent need now for higher public expenditure on education at all levels – from schools to universities, advanced research institutions.

Stick to fiscal consolidation efforts
The current government has an exemplary record of fiscal consolidation so far. However, given that 2018-19 Budget will be the last full-year Budget of the current government and will have a bearing on the government’s prospects in the next Lok-Sabha polls, it is easy to get tempted

 Budget 2018: Modi govt has a strong case to stick to fiscal roadmap; it should not opt for populist track

Representative image. Reuters

towards a populist Budget. Even without populist announcements, India’s fiscal position is looking precarious at present. Shaky growth pattern have increased the demand for fiscal stimulus. Expenditure demands to reinvigorate growth along with revenue underperformance following change in taxation structure and rising crude oil prices has started to stretch fiscal position. While efforts to expand the tax base will accelerate government revenue in medium term, it will likely constrict fiscal space for next year at least.

Given that India's high fiscal deficits in past years have already led to the accumulation of sizable general government borrowings (about 67 percent of GDP in 2017, net of liquid assets) and relatively high debt servicing costs (about 20 percent of general government revenue), any further slippage and debt will crowd out investment both public and private and impact future growth apart from posing immediate upside risk to inflation.

Revival in rural economy

The two biggest structural policies -- GST and demonetisation -- were aimed at formalisation of economy. However, in the transition from informal to formal economy, it is imperative that transformation of rural economy into a part of mainstream economy happens concurrently as well. While expansion of non-agricultural activities has saved us from rural distress, farmers’ income has not improved significantly over last few years. And that is an area where the government needs to focus in this year’s Budget. Despite record output, farmers’ incomes have fallen. Deflationary trend in food products is affecting farmers the government needs to announce some sort of a price mechanism. Policies aimed at making farming a remunerative option will develop rural economy as a vibrant part of India’s growth story. Access to formal credit and banking services, coupled with creation of jobs and improved wages, will lead to consumer spending, which augurs well for the overall economy.

In the current cycle, government has critical responsibility of delivering a growth-oriented Budget that takes care of investment and job concerns and not get way laid by populist imperatives.

Click here for full coverage of Union Budget 2018

(The writer is an economist, RBL Bank)

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Updated Date: Jan 30, 2018 15:04:48 IST