No bolster to growth, jobs

In the wake of an impulsive but damaging hit on the economy and masses through abrupt demonetisation, whatever its sugary objectives, a helpless Finance Minister Arun Jaitley has tried to do a cover-up operation through his Budget for 2017-18. In the result, there is little promise of a growth spurt or private investment revival of an order needed to create jobs, in the penultimate year of the Modi Government's five-year term. The Budget does make an attempt to tinker with direct taxes and offer some relief for the middle class while projecting a pro-farmer and pro-poor profile that the ruling party badly needs. Broadly, however, it takes care of macroeconomic stability and fiscal prudence with marginal increases in public investments in infrastructure but unlikely to crowd in private investment.

While the income tax cut by half to 5 per cent for incomes upto Rs. five lakhs could provide some boost to consumption, held down by the 'notebandi', Jaitley limited the promised corporate tax cuts to medium and small enterprises, which had also taken the beating from demonetisation. With such damage-repairing efforts, the budget comes out as more a workmanlike exercise, reserving major reforms for another day. This is understandable in a situation of economic decline and continued stress in the banking system. The pre-Budget Economic Survey had painted a sombre picture of the state of economy, a growth decline by 6.25 to 6.75 per cent in the current year and projection of 6.75 to7.5 per cent in 2017-18. (IMF estimates are 6.6 per cent and 7.2 per cent for the two years). The CSO like the MPC Committee earlier had also pruned down growth estimate from 7.6 to 7.1 per cent this year, without taking a full measure of the demonetisation impact.

Jaitley has based his budget estimates for 2017-18 on assumption of GDP growth at 11 per cent at current prices. Real growth could be in the range of 7 to 7.5 per cent, if CPI inflation could be held at below 5 per cent in the coming year. None could be sanguine about the outlook as the budget itself takes note of higher global risks and geopolitical uncertainties in 2017.

Apart from scheduled rises in US interest rates and strong dollar, leading to capital outflows from emerging economies including India, a globally disruptive order is emerging under the new Trump Administration in Washington, as it proceeds to ruthlessly enforce its immigration controls and holds out threats of protectionism.

These and other tough measures on President Donald Trump's agenda would trigger major shifts in financial and commodity markets impinging on capital flows, currency rates, and world trade. India's growth ambition to hit 8 per cent may have to be reserved for the next decade. As the Survey points out, higher growth would necessarily have to come from a sustained growth in exports, an area where India's record was dismal over the last few years, as has been the case with many developing economies.

Mr Jaitley has struck a balance in trying to remain fiscally prudent by targeting fiscal deficit at 3.2 per cent of GDP, instead of 3 per cent as was envisaged for 2017-18 in the earlier road map for fiscal consolidation. This is only a marginal relaxation for meagre additions to government's capital spending though the Finance Minister has ensured that Government is on track with fiscally prudent regime and macroeconomic stability necessary to attract foreign investors. Fiscal deficit was contained to the budgeted limits of 3.9 per cent of GDP and 3.5 per cent in the two earlier years.

At home, the corporates, whose animal spirits have been lying low for the Modi Government's first three years, the Budget does not offer the tax cut keenly awaited by them in line with the earlier promise of Jaitley to lower corporate tax rate to 25 per cent over a three-year period. The Finance Minister confined the benefit of reduced rate for small companies with turnover upto Rs. 50 crores in 2015-16. MSEs have been the backbone of the economy contributing in a large measure to growth in manufacturing output and employment and exports. It does not seem that India Inc. can start investing until Government is able to fix what the Economic Survey termed as 'Twin Balance Sheet' problem. This involves both the inability of banks with its huge pile of non-performing assets to lend afresh and the balance-sheet problems of the over-leveraged companies.

Despite some efforts set in motion, the Modi Government has avoided a big bang approach in attacking the banking mess, by way of recapitalising and/or restructuring bringing down public equity. The budget makes a relatively small appropriation of Rs. 10,000 crores for recapitalisation. In his speech, the Finance Minister talked of undertaking banking reforms and enactment of a comprehensive law to deal with resolution of financial firms.

The Modi Government has held out again in the budget proposals to further liberalise FDI, such as allowing investments through the automatic route and abolishing the Foreign Investment Promotion Board (FIPB) and raising caps in several other sectors. But Government is yet to tackle effectively dispute resolution and other problems dogging the PPP projects in core areas of development.

Essentially, Jaitley maintained for the coming year the structure of the 2016-17 Budget while making incremental allocations for rural areas and social sector besides infrastructure, and duly gained a thumping of desks from the Treasury benches, heartily led by Prime Minister Modi.

Later, Modi commended the budget as one with focus on fulfilling the "dreams" of every section including the poor, farmers and underprivileged. The budget, in his view, reflected commitment to raise investment and create employment opportunities.

Jaitley also seemed to have cracked political funding, in the context of measures on digitalisation of the economy he unleashed through the Budget, by restricting any individual donation to a political party to Rs.2000 in cash. Parties can otherwise accept donations by cheques and digital modes. Promoting use of money through modes other than cash would make the economy "cleaner and transparent" according to him.

The tax to GDP ratio is estimated at 11.3 per cent in BE 2017-18, the rise above 11 per cent for the first time since 2007-08, and it could further rise to 11.6 and 11.9 per cent of GDP in the following two years, according to Finance Ministry statements attached to the Budget. The official claim is that the demonetisation would result in increase in the size of the organised sector and widen the tax net and once remonetisation is gone through, the economy would "bounce back on the strength of pent up consumption demand".