Amidst uncertainty, some stability

After the disruption caused by the November demonetisation of high-value notes, what the economy needed most of all from the Budget was an absence of further shocks. This was not a year for ambitious budgeting or bold initiatives. Also, as Arun Jaitley outlined at the start of his Budget speech, there is considerable uncertainty facing the economy, domestically and internationally. Given this context, Mr Jaitley has delivered what the situation demanded: A Budget whose principal message is stability and responsibility. The result is the relief rally on the stock market. For the sixth year in a row, the fiscal deficit is being reduced. To investors and financiers at home and abroad, this will be a strong message about the system’s seriousness in pursuing a key macro-economic objective. The pay-off will come, if not now then later, in the form of better credit ratings for the country, and easier access to capital on better terms — which should facilitate faster growth.

Mr Jaitley’s fourth Budget is also notable for the conservatism that marks his revenue projections, and the tight control that he has maintained on expenditure. While tax revenue is expected to grow by about 12 per cent in 2017-18, more or less in line with projected GDP growth, this owes a great deal to the expectation of a 25 per cent surge in income tax receipts, on top of a similar surge this year. If such a bonanza materialises, it would be a positive fall-out of demonetisation. The assumptions on revenue growth in excise, customs and service tax show a contrasting picture of caution, almost certainly because of the uncertainty that will come with the introduction of the goods and service tax (GST) later in the year.

The bad news comes in the form of a drop projected for the inflow of non-tax revenue, primarily on account of smaller spectrum fees and possibly public sector dividends. The result is that over-all revenue grows modestly. The finance minister has responded to this prospect by keeping down growth of expenditure to a miserly 6.6 per cent in a year when nominal GDP growth is expected to be 11.75 per cent. Two consequences have followed: The giveaways on income tax and corporation tax have been selective and strictly limited, and the individual outlays show modest increases for the most part. Although Mr Jaitley made a point of outlining how tax evasion is manifestly rampant, it is encouraging that income tax coverage will improve to 2.6 per cent of GDP. It could improve further, and well might in the coming years as evasion becomes more difficult—or, at least, less easy. However, the decision to split companies into two categories for the purpose of corporate taxation invites the problems that marked small-scale industry reservation: Companies are being given an incentive to stay small, or to be split into multiple entities so as to enjoy a lower tax rate. This is retrograde.

In terms of expenditure, the focus has been on allocations for existing programmes. No new ones have been announced, suggesting that the Modi government’s bouquet of “schemes” as the Budget calls it (replacing the abolished “Plan”) have been rolled out in entirety. To the extent possible in the face of revenue constraints, Mr Jaitley has tried to boost capital expenditure—which has gone up from 12 per cent of the total in the 2013-14 Budget to a projected 14.4 per cent for next year. That is still a modest number, given the requirements of investment in physical infrastructure. What bears asking is why centrally-sponsored schemes continue to account for such a large chunk of the Budget, growing faster than over-all expenditure both this year and the next. Greater devolution of funds to states should mean fewer and smaller centrally-sponsored schemes.

The Budget has its share of policy announcements. The move to capture all legislation governing labour under one legal umbrella, and a new law on contract farming are to be welcomed. The latter is unavoidable in the wake of the fragmentation of farm holdings into individually unviable units. While the abolition of the Foreign Investment Promotion Board has been generally welcomed, one must wait to see what system replaces it. Similarly, the creation of an oil mega-corporation by merging existing government-owned companies could end up being a mixed blessing. There is logic to merging upstream and downstream operations, but corporate cultures differ and often make such mergers problematic. Also, over-arching oil megaliths like Brazil’s Petrobras and Russia’s Rosneft tend to invite political misuse; one needs to learn from the troubles and scandals that have engulfed Petrobras in recent times. The attempt to clean up political funding is welcome, and gives added meaning to the Modi government’s drive to reduce corruption and the black economy, but the proof of the pudding will be in the eating.

What does the Budget do to promote growth, which has dipped in the wake of demonetisation? Not enough. What is particularly bothersome is the fact that the government banks’ bad debt problem continues to evade a solution. The Budget’s provision of another Rs 10,000 crore as equity support, on top of Rs 25,000 crore provided in each of the last two years, is simply not enough. Bank credit growth has collapsed to desperately low levels. Since no economy can grow without credit keeping pace, the government needs to come out with effective solutions. Last year’s bankruptcy law needs to be made operative, and the promise of the Banks Board Bureau needs to be actualised.

A final word is required on the improved presentation of Budget numbers and announcements. They have been grouped and collated so as to achieve greater transparency and facilitate easier understanding. Like so much else in economics, Budgets too need to be de-mystified.

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