Budget from a disoriented regime
India awaits the fourth budget of the Modi Government on February 1, against the backdrop of the disastrous demonetisation, growth decline, and heightened global risks and uncertainties. Fiscal 2018 is set to go through another challenging year in growth recovery toward a probable official projection of 7.5 per cent, after a three-year low in the current year.
The new Trump Administration in the USA, more inward-looking, could also hurt India's growth, especially in the most productive IT sector, at a time our economy is exposed to rising oil and commodity prices, higher interest rates abroad, strengthening the dollar and capital outflows from emerging market and other developing economies.
India would also have to overcome volatility in exchange rates and some toughening on the external account. The world is running into a new bout of US-led aggressive protectionism, most harmful for our vulnerable export system.
Finance Minister Arun Jaitley, exhibiting his usual aplomb, sees no contraction in revenues and expects his budget to undo at least part of the damage inflicted by the note ban on the people, rural areas in particular, and on the economy as a whole from the abrupt tampering with financial stability. His tax and spending proposals will be designed to make good the loss of political face for the Modi Government in the country.
However, Jaitley is under electoral constraint to broaden the scope of his budget as would be seen to be aimed at gaining any political advantage for the ruling dispensation. But, Prime Minister Modi had, before the Election Commission announcement of dates for polls in UP and other states, offered some sops to the poor, the farmers, senior citizens and small enterprises in the country, who might have been hit by his botched demonetisation.
Barren of positive results to show up for the black money hunt from this botched demonetisation, Jaitley draws comfort that it has helped to widen the tax base. To make it surer, the taxmen have been let loose with the widest powers so that even honest citizens with genuine savings in the system would not be spared from harassment. The Modi Government, which at one time claimed credit for doing away with 'inspector raj' in some sectors of manufacture, would have substituted it with 'taxmen raj'.
Augmentation of revenues in all possible ways is the principal concern of Finance Ministers who have always maintained that it would help them to be able to allocate more resources for poverty alleviation, social sectors and 'inclusive' development.
Even more important for them is to adhere to the road map for fiscal consolidation. Revised estimates for 2016-17 in the Budget would tell us whether Jaitley has been able to adhere to the targeted 3.5 per cent of GDP as fiscal deficit. For the coming year, he is expected to re-work the road map on the basis of the report of an official committee reportedly favouring a flexible range, keeping in view both the growth imperative and fiscal consolidation.
Taking Centre and States together, the fiscal deficit at 6.8 per cent of GDP is considered one of the highest among G-20 countries. Public debt as a ratio of GDP in India is also regarded one of the highest. The Budget data should be revealing on how far IMF's advice on fiscal management, in the aftermath of growth dropping to 6.6 per cent in fiscal 2016 has gone into its framework.
After the ignominy and loss of credibility that RBI had brought on itself from the demonetisation episode, having had to follow political arbitrariness, Governor Urjit Patel found his voice to caution Government against "frittering away gains" in macroeconomic stability through giveaways. He noted the general deficit and debt ratios at present levels is held as one of the principal factors hurting India's credit rating.
It remains to be seen whether economic recovery gets a significant boost in the forthcoming Union Budget with growth-friendly policies - involving public investment at a higher level than provided so far, mainly for infrastructure, (crowding in private investment), on the one hand, and Corporate investment revival, at least in the fourth year of the Modi regime.
The prospects on this front could improve this year, depending on the tax reforms that have been in the air. These include cut in corporate tax, raising the personal tax exemption limit, reduction in exemptions and possible readjustment of slabs and rates designed to secure sizable additional resource mobilisation.
Whatever the package of tax concessions in the Budget in myriad ways, for individuals and corporates, the Finance Minister will try to make a big play with what he would propose for the farmers for easing repayments on credits and farm infrastructure. From time to time, the rural economy is brought to the centre of attention but hardly have we become wiser about the outcomes.
In the aftermath of demonetisation, Jaitley has turned his advocacy on digitalisation of the economy- not growth and jobs as much. Would he tell the country what indeed has been achieved in the 31 months of NDA Government concerning jobs, with Modi parading "development" plank, which catapulted him to power? The number of jobless in India has been steadily rising, more than the normal addition to the workforce, and the total would increase to 18 million by 2018, according to ILO estimate.
There has been a cacophony of slogans, acronyms and policy shifts leaving people to wonder when the "ache din" will come. Modi's "Make in India" has to compete with similar nationalistic slogans in the USA and other economies in what could turn out to be a race to the bottom. New technologies, we seek, would be more labour-saving than job-producing.
All that the Prime Minister seems to associate with development is modernisation like smart cities, high-speed trains, etc. and now digitalisation, the option perhaps he had in view in delivering a cruel blow to exterminate cash from the economy. Overall, life has become harder for the ordinary citizen. The total disconnect between Ministerial pronouncements and ground realities is palpable. Against claim on low inflation, ever-rising prices in the market for almost everything, food or other basic consumption goods.
(The views expressed are strictly personal.)