The budget season is round the corner. Although the exact date of the budget presentation has not yet been announced, reports speak of Finance Minister Arun Jaitley quickly getting down to the nitty-gritty of budget making. The budget, to be presented by him in July, will be for 2014-15. The interim budget presented by P. Chidambaram in February was essentially a vote-on-account to keep the government machinery going during and immediately after the elections.
The budget will naturally address the economic concerns of the day. Accelerating economic growth will figure high in the Finance Minister’s agenda.
Two recent events — the release of official growth statistics for 2013-14 and the Reserve Bank of India’s policy review — will have a bearing on the fiscal policy.
On May 30, the Central Statistics Office (CSO)) released two sets of data — provisional estimates of national income for 2013-14 and GDP estimates for the fourth quarter (January-March 2014 ) of last year. These are the first important official data releases after the new government was formed. Their significance lies as much as in throwing light on how the economy fared under the previous government’s watch as in delineating the policy challenges that the new government faces in pushing the economy to a higher growth path.
The economy has been struggling to reach even a 5 per cent annual growth rate, and the latest data reinforce the point. In 2013-14 the economy grew 4.7 per cent, which is even below the advance estimate of 4.9 per cent in February.
The news while being disconcerting is hardly surprising. Economic growth in 2013-14 was not expected to be substantially better than in the previous year, when it clocked a ten-year low of 4.5 per cent. For two years in a row, GDP growth has been below 5 per cent. In fact, barring in one quarter — the second quarter of last year — the economy has been growing less than 5 per cent in every quarter over the past two years. The GDP growth trajectory has unmistakably shifted downwards.
From posting a respectable growth rate of 8.1 per cent in 2010-11, the economy has slipped badly to a position where even a growth rate of 5 per cent or above seems out of reach. However, it is not totally unrealistic to expect the economy to grow faster than now. It is the opinion of many that the economy has bottomed out. From now on, it should grow at a more respectable rate. The statistics also give an insight into the sectoral weaknesses that are dragging down the economy.
The NDA government has already initiated steps to revive important sectors such as manufacturing, which have lagged behind. Infrastructure is expected to receive a big boost. The budget is sure to reflect these and much more.
RBI’s policy review
The RBI’ second bi-monthly policy (on June 3) was scheduled before the elections. Therefore, apart from the usual interest that any credit policy review commands — whether there will be a rate cut or not — this one was topical in one major way. How far will the monetary goals mesh with those of the fiscal policy (budget)?
In a sense, RBI Governor Raghuram Rajan’s meetings with the Finance Minister and the Prime Minister before June 3 seem to have prepared the ground for a collaborative approach. Monetary and fiscal policy need to complement each other. Of that more will be known when the budget is presented. The RBI did not effect any change in the policy repo rates. While maintaining its focus on inflation, it promised to ease money if inflation moves downwards.
A cut in the statutory liquidity ratio (SLR) by 0.5 percentage point to 22.5 per cent was the only surprise in what is seen as a generally dovish policy statement. The SLR is the mandatory investment in select government bonds by banks. A reduction, therefore, should mean more resources for banks to lend. This has also been a reform measure — all statutory pre-emptions (the cash reserve ratio and the SLR) are to be phased out.
Yet in the present context, banks have resorted to buying SLR securities in preference to commercial lending. Banks’ investments in SLR securities are at around 29 per cent, far higher that what the RBI had stipulated.
Thus, it would require a combination of factors — economic revival, improved governance and importantly a quantum jump in credit disbursements by less inhibited bankers — for this specific relaxation to bear fruit.
However, it is seen that the Governor has laid the framework for not only reform but making available more funds at banks’ disposal for lending, among others, to the vital infrastructure sector.
The RBI estimates GDP growth during this year to be higher than last year. A median estimate of 5.5 per cent in a wide range of 5 to 6 per cent is indicated. The onus of achieving such a rate rests largely on the government. There is optimism in the air. Will the budget have concrete proposals to sustain it?
Monetary and fiscal policy need to complement each other.