Getting economy back on growth rails

India, and indeed the world, awaits to see how our “fastest-growing economy” would at last move forward in the new fiscal year 2016-17, from a two-year slough, amid major reform hurdles at home and convulsions in global financial markets, which together keep investors wary and domestic corporates in a bind.

It is against this background with added challenges on the fiscal front - raising capital expenditure, holding the deficit at a credible level, addressing rural distress, mitigating banking woes, stabilising tax policies and incentivising private investments - that the Modi Government has to come up with a Budget both of promise and delivery, on February 29.

For three years now, including two on Modi watch, the economy has been virtually stagnating, despite a steep fall in oil prices helping a fiscal turnaround in the current fiscal year and lowering inflation, though the consumer has hardly gained in the process.

The GDP and GVA data released by the Central Statistical Organisation on February 8 for the two years ending March 2016, with periodical revisions, do not substantiate official claims that the economy has got over the hump, considering the wide sectoral imbalances shown up in the first three-quarters.

While the advance estimate of 7.6 percent (GDP) and 7.3 percent in GVA (Gross Value Added) for fiscal 2016 may have comforted policy-makers, it would be contingent on at least a 7.6 percent growth in the last quarter (Jan-March) as against the 7.3 percent in the third quarter. CSO has assumed a strong manufacturing revival at 9.5 percent for the year whereas its own estimate for the first nine months April-December was a mere 3.1 percent.

Politically, however, the Government has to fight the growing perception of its disappointing performance in the first two years in relation to expectations that Modi had raised in 2014 for  growth and jobs.

While the oil scenario continues to be favourable for the coming year, Finance Minister Arun Jaitley has to tread cautiously in balancing the fiscal imperatives with the political compulsions into which the Modi Government is entrapped. 

He is strongly advised to adhere to the targeted 3.5 percent of GDP in fiscal 2017 to retain the confidence of investors and global credit rating.

The other view contrarily is that with inflation contained, the Finance Minister could allow a slight rise in the deficit which would not make much of a difference to investor sentiment, given the stable macroeconomic environment India has been able to maintain. And Prime Minister Modi asserts India is the only major economy moving ahead strongly in the midst of the global economic crisis.

Whatever be the final view, the Budget has to provide for public investment in infrastructure, urban and rural, as well as spending on social development sectors including rural employment, where cuts in the current year to ensure commitment to the fiscal deficit target had drawn flak. The axe fell on sectors making for inclusive growth.

Secondly, even more, important is the acute distress that has enveloped the countryside, with hundreds of suicides of farmers - a lot more than what used to be an annual feature for indebted farmers faced with crop failures. No wonder there has been a decline in rural demand for goods.

As a result, the Prime Minister started sounding “pro-poor” slogans on every scheme being announced. He has been on an overdrive to reach out to farmers in several states and persuade them that his government is pro-farmer, taking care of their interests - farm support prices, food security, irrigation, and so on.

He may be seen to be drifting away somewhat from the brand of development that corporates had tended to associate with him, the Prime Minister does not want the grass to go under his feet, given the growing opposition moves to mobilise the rural folks and Dalits with “anti-Modi” slogans.

The string of state elections in 2016 and 2017 has its own compulsions in the framing of economic and budgetary policies of the Modi Government. Having lost both Delhi and Bihar and suffered some reverses in by-polls in 2015, the BJP is determined to recapture a winning spree in forthcoming state elections and re-create a new dominant space where it is non-existent and re-establish its hold in the Hindi heartland (UP).

The Prime Minister has attached great importance to budget formulation this year and would like to make it a “transformative document” which would not only set the economy on a high growth path but also ensure that it brings about “inclusive” growth and development.

Since the Modi Government seems to have given up on any path of consensus-building with all opposition groups and is ready even to defer GST for the present, it would in no way turn the budget session beginning February 23 to be any less stormy.  The Congress is planning to make an onslaught on a wider range of government policies and Modi governance.

Be that as it may, Jaitley’s concerns would be how to construct a budget that would, while keeping up the pace of capital expenditure (mainly infrastructural) and providing for extra spending on wages and pensions as per the 7th Pay Commission recommendations, also ensure fiscal consolidation as well as  hold price pressures in check.

Jaitley is expected to proceed with implementing commitments on corporate and other tax reforms along with the removal of certain exemptions. His challenge would be in mobilising additional resources over and above extension of subsidy reform which would cover fertiliser as well while widening the DBT coverage.

The bulk of additional revenue usually comes from adjustments in duties and rise in the Service Tax. The government has performed poorly in realising non-tax revenue as budgeted, especially from divestment. While tax collections in the current year are reportedly closer to expectations, the Finance Minister would count on larger yield next year from the rise in domestic consumption with the salary hikes in Government and corporate sectors.

It remains to be seen whether aggregate demand in the economy picks up in line with whatever growth rate is assumed in the Budget. Any marked revival of the economy would be dependent also on corporate sector response to reforms and incentives that the Budget may provide for as well as a return to health of the public sector banking system.

(The views expressed are strictly personal)