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Union Budget 2017-18: Too conservative for its own good?

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Since the announcement of the Union Budget 2017-18, several adjectives have been adopted by people from different yet relevant walks of life to describe it: symbolic, prudent, no-nonsense, routine, so on and so forth. Even more interesting is the mixed reactions it has evoked from varied quarters. But all that is needed to ascertain if the budget is a good one or a bad boils down to three crucial understanding: First, is budget enabling fiscal policy; second, is budget helping spur investment and consumption; third, is budget alleviating the living conditions of the people.
Satrajit Majumdar – Infra Analyst

Those who have heard the speech of India’s Finance Minister Arun Jaitley will straightaway know that this budget has been created with one eye on fiscal policy. While in the aftermath of demonetization there was a raging expectation that the government will indulge the industries and individuals with sops, the government chose to stick to its conservative approach of maintaining fiscal prudence. It has increased total expenditure by a paltry 6.57 percent vis-à-vis last fiscal year which enabled the administration to restrict its fiscal deficit target to 3.2 percent of GDP for the year. It is evident that this was the government’s way of sounding off the private players and investors to shoulder the financial burden of economic growth. Hence measures like scrapping of FIPB and invoking policy reforms to stimulate public private participation in projects.

Coming to investment, there was a clear understanding in the air prior to budget that the infrastructure sector will be the primary beneficiary of government doles. There is enough empirical economic evidence that infrastructure development is directly proportional to productivity and economic growth. Simply put, developing an integrated infrastructure can spur productivity, propel job creation, enable efficient trade and support fiscal growth. Keeping to the basics, government has drawn attention to multimodal logistics and transport infrastructure and its monetary allocation, at least from the top, creates the impression that that is what it has set out to achieve (out of Rs 3.96 lakh crore, the budget has allotted Rs 2.41 lakh crore for road and Rs 1.31 lakh crore for railway). But dig deep and it will be clear that the measures are not aggressive enough to bring about transformation. There is also no clarity how the Government will be able to address the plethora of issues that has left the sector in distress through monetary outlay alone. Current understanding is the incentives along with sops for affordable housing will lead to a positive multiplier effect.

From affordable housing to propping up rural sector to improving social conditions of the poor  and even tax benefit to the low-income segment of the society means there is not too much scope for driving consumption to support economic growth. This is because the benefits which the farming community and the lower middle class will accrue will largely go into sustenance, leaving little scope for generating the kind of consumption that leads to fuelling of economic engine. The budget overlooked the challenge of the banking system too which remain overstretched. This means the banks will continue to be reluctant to lend more – a crucial force behind consumption-led economic growth.

The finance Minister in his budget speech had said, “the thrust of my tax proposals in this Budget is stimulating growth, relief to middle class, affordable housing, curbing black money…”. The measures announced reveal that the Government is intent to drive growth primarily through the SMEs and MSMEs. This can be understood only if we consider that the engines of the economy will continue to remain stable and large enterprises can continue to do business as usual. In reality that may not continue to be the case.

The measure to halve the tax rates of people in the tax slabs of Rs 2.5 lakhs to Rs 5 lakhs while introducing a 10 percent surcharge on income slabs of Rs 50 lakhs and above mean the Government has transferred the tax burden to the upper middle class. This provides minor relief to the lower middle class. But such a divergent stance can result in deterring the upper and upper middle class populace from fully disclosing their income which can lead to two problems: hinder government’s aim to create transparency and hurt government’s revenue coffer. Budget however has left the capital markets untouched which will enable the rich to enjoy the fruits of their investments. In that sense, budget succeeds to balance it out.

In the beginning of his speech, finance minister had stated that three challenges – monetary policy stance of the US Federal Reserve, uncertainty around crude price and signs of “increasing retreat” from globalisation of goods and services. If Federal Reserve increases interest rates to maintain stability of US’ economic growth, there is the challenge of drying up of capital inflow. A retreat from globalisation of goods and services means exports can get hurt. At present, the reform measures announced for the infrastructure sector and the budgetary outlays made do not seem to be enough. The government also refrained from sharing its ideas about developing an exhaustive multimodal logistics network. A passing mention does not help.

More crucial is the uncertainty of crude prices. It seems, from finance minister’s speech, that the Government feels shale gas and oil production, globally, will be able to “temper the challenge” of rising crude oil price. The assumption of the price level of crude is anybody’s guess right now. It all depends on how global geopolitics will play out and up to what extent OPEC countries will control the sale of crude in world markets. If crude price breach the US$75 mark, India stands to lose a substantial share of its GDP growth, besides seeing inflation surge. Is the assumptive premise of the budget correct and are the budgetary measures providing enough propulsion to Indian economy to withstand the challenge? Only time will tell.

Views mentioned above are personal

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