The Budget for this fiscal year is a balanced one which takes forward the work done in 2016-2017. It has been drafted without causing any distortion and the incremental changes that have been made may add a delta to the growth process. It is what would be called in economics a Pareto-optimal state, which benefits some and hurts none.
The starting point of the Budget is the fiscal deficit and to the credit of the government, it may be said that by lowering the rate further to 3.2% of GDP, the signal given is that the 3% mark will be the destination. Hence, while it will debate the possibility of moving to a model that affords flexibility to the extent of plus/minus 0.5% of GDP, for the time being it would be sticking to the existing fiscal responsibility and budget management target. This number also gels well with the gross borrowing programme of the government which has been put around ₹6.05 lakh crore, almost the same as last year. This makes it neutral to liquidity in the system as well as interest rates. The Reserve Bank of India can now take its call on policy rates independent of the government’s borrowing programme. The concern earlier was that there was untoward pressure being put on the liquidity situation by high government borrowing.
A positive impetus
The Finance Minister has given a little bit everywhere. While the corporate sector would have liked to see the tax rate lowered across the board to less than the existing rate of 30%, it has been selectively done. There is still the assurance that in course of time the 25% mark would be delivered. Households should be happy that the income tax rate has come down effectively, which should help in increasing their spending level which was impacted quite decisively by the demonetisation move invoked in November. Further, as the Finance Minister has left the indirect taxes slabs unchanged, the inflation impact from the fiscal front would be neutral for households, though once the Goods and Services Tax (GST) is introduced there would be a differential impact on prices of various goods and services.
On the expenditure side, there has been around 11% growth in capital expenditure (capex) of the government, which is higher than the overall growth in the total expenditure for FY18 which was 6.5%. The focus has once again been on railways, roads and urban infra where the spending in FY17 was also higher than what was budgeted. This will have a positive impact on the industries linked to these sectors such as cement, steel, machinery, electric equipment, etc. Add the thrust given to housing and these industries would witness better prospects in the coming year.
However, this positive impetus must not be overstated for two reasons. First is that the amounts involved are not very large, and hence while consumption will benefit from more purchasing power in the hands of the public, it would be on an incremental basis and concentrated on specific goods. Second, for investment too, a sum of around ₹30,000 crore in incremental terms would be a fraction of the overall GDP of the country and hence while the impact would be positive, it may not be significant. The private sector has to play a more dominant role in enhancing investment, and this is probably where the Budget could have provided some focused benefits on corporate taxes to spur investment. Until this happens, it is unlikely that capital formation rate will get reversed.
An eye on the road ahead
The government, however, is not really betting on a substantial pick-up in GDP growth this year and hence these measures announced are in conformity with the 11.75% nominal GDP growth number assumed in the Budget, an implicit nod to a GDP growth number of 6.75-7.5% as projected by the Economic Survey. Hence, this year may be looked upon more as a period of consolidation when the economy gets used to the new environment, which will include the GST and the remonetisation process.
A clue provided along the way in the Budget is the expectation of another big disinvestment programme this year. While it has become a habit to target a high amount with the final realisation being between 60-75%, the target of ₹72,500 crore is very high and assuming that it has been thought through carefully, we could expect to see a flurry of such ventures in the year. There has been some talk of State public sector enterprises also coming under this umbrella to the extent that the Central government has shares in them. This can be one of the biggest exercises this year and can be a booster for the capital market. The routes chosen would be critical and one would hope that there are more public issues rather than buybacks which are analogous to cash transfers from the entity to the government.
Overall, the Budget has been generally positive for the economy though expectations were much higher. As long as capex is maintained and the fiscal targets are adhered to, the Budget could be said to have done what was expected. Taking a cautious route is probably pragmatic considering that post-demonetisation there is GST to contend with, which requires several adjustments at the government level too to ensure that the outcomes are in accordance with the overall plan.
Madan Sabnavis is Chief Economist, CARE Ratings. Views are personal.
