<b>Abheek Barua:</b> The <i>notebandi</i> antidote

Budget 2017 went the way of previous “Jaitley Budgets”, high on detail but with a somewhat smudgy big picture. However, experience shows that these workman-like Budgets fare better at delivery than grand mission statements. Thus, on this metric this Budget should get a reasonably high score.

Although the discussion on the adverse impact of demonetisation was cursory in the FM’s speech, various fiscal announcements suggest that the budget- makers both recognised and sought to remedy the disruption that it caused. These remedies range from the step up in allocation to the rural economy (feared to be hurt most severely by the note ban), tax breaks for medium and small enterprises (MSME) and income tax reductions for individuals particularly in the lowest tax tier. The MSME segment is a large employer and lower income groups tend to be associated with a higher propensity to consume. Thus, these incentives have the potential to both get jobs back and boost consumption. As part of the rural initiative, the MGNREGA gets a large allocation and that is as direct a job creation scheme as there can be. The biggest gains from all this is likely to for the beleaguered consumer staples sector and a range of industries producing farm inputs.

The FM’s decision not to announce new spending programmes but instead to allocate more to existing programmes seems prudent. Development and welfare spending in India take place through a mind-bogglingly large number of schemes that need to be consolidated. Besides, greater allocations do not necessarily mean better utilisation of funds and “absorption” of allocated funds remains a critical problem. The Budget recognises both these issues. The announcement of a new consolidated outcome review jointly with the Niti Aayog that the FM has promised might go some way in ensuring better implementation. I hope that the emphasis on project implementation improves the shovel-readiness of projects in sectors such as the railways that has clearly fallen short of its targets.

That said, some would argue that the FM has missed the nub of the economy’s problem — the “twin balance sheet” crisis that Tuesday’s Economic Survey pointed to. This is the familiar problem of over-indebted companies’ inability to service debt and the resultant strain on bank balance sheets that continues to worsen. The Survey’s suggestion to use some of the windfall from the note ban to capitalise a publicly funded “bad bank” (that would take some of the worst performing loans off banks’ books) seemed eminently sensible but finds no mention in the Budget. Besides, the piffling amount of Rs 10,000 crore allocated for bank recapitalisation might raise suspicions that the government is yet to fully recognise the enormity of this problem.

Then there is the Universal Basic Income scheme where again the Survey provided some compelling evidence in its favour as a substitute for the extant plethora of welfare schemes and subsidies. The government’s reluctance to take the first step towards this (perhaps through a pilot scheme) is puzzling since not only does it make for good economics but also it would pay a clear political dividend in the long term.

Besides Mr Jaitley’s decision not to fully utilise the escape clause provided by the FRBM committee (given the disruption caused by demonetisation) and keep the deficit at 3.5 per cent also disappoints given the need for fiscal elbow room to prop up both public investments and rev up the consumption momentum. There is certainly a risk that the government would face a funding constraint down the year. However, this commitment to fiscal consolidation and the associated fiscal deficit target of 3.2 per cent of GDP has translated into a smaller market borrowing number (Rs 3.48 lakh crore) than the bond markets had predicted. This is with some help from a large increase in small savings that partly funds the deficit. Lower government borrowings should push interest rates down a tad and aid the consumption momentum. The commitment to consolidation also puts pressure on the RBI to reduce the policy rate in the next monetary policy due on 7th of this month.

Some of the assumptions underpinning the Budget are likely to rankle. Both the nominal growth rate in GDP assumed for the current fiscal year of 11.6 per cent and 11.9 per cent for 2017-18 seem a trifle aggressive if one factors in both the impact of demonetisation and the continued sluggishness in investments and exports that is unlikely to improve soon. “Miscellaneous capital receipts”, an amalgam of conventional disinvestment, strategic divestment and “listing of insurance companies”, are projected to yield Rs 72,500 crore, a tall order indeed given the myriad uncertainties on the global front, specifically the problems of emerging markets that the FM alluded to at the beginning of his speech.

Mercifully, the revenue projections do not share the exuberance of the GDP assumptions at least at first glance. The government clearly wants to depend on the two Ds—demonetisation and digitalisation—to expand the individual and corporate tax base while the goods and services tax (GST) when (and if) implemented could help indirect tax collections. Given all this the 12.2 per cent growth in gross tax revenues seems to be reasonable. However, the impact of the GST both in terms of the impact on collection and sharing with states does not seem to be factored in at all. Thus, these projections are at best tentative. Headline expenditure growth also looks terribly sedate but a look at the fine print suggests that this is partly due to underestimation of subsidies. One has to fall back on a cliché to describe this budget and term it a “mixed bag”. It appears to do its bit to counter the effects of notebandi but clearly falls short when it comes to the other major problem of the economy — the steady rise in bad loans of banks. Some of its assumptions seem realistic while others are bound to raise a few eyebrows.
 

The writer is chief economist, HDFC Bank