By S. Sethuraman
The Finance Minister Mr Arun Jaitley has manifold challenges for his fifth and final budget for 2018-19, a politically-loaded exercise ahead of the Lok Sabha Poll 2019. The country’s fiscal system has taken a beating in the current year, mainly due to a half-baked GST, while the Modi Government singularly failed to coax domestic investments for four years at a stretch.
Whatever the state of finance including a slip in budgeted fiscal deficit, can Mr Jaitley ignore the sobering lessons of the recent narrow win for BJP in the Prime Minister’s home state? Rural distress has thus emerged at the top of concerns. The other demonetisation-devastated MSE sector, despite its major contribution to the economy, may not get a similar focus. An industrial (manufacturing) revival remains frozen.
How to make a blend of Growth and Populism and yet ensure a semblance of responsible fiscal management? The Finance Minister will also be held to account if “reforms” altogether take a back seat, even if all that he just manages to earn some kudos, could be a meaningful restructuring of the vexatious Goods and Services Tax (GST). By itself, it should be commendable not only for better revenues but also for the nation-wide single tax to get a smooth run.
Whatever forms addressing rural distress take, a seemingly major push in public investment on infrastructure (roads, ports, airports etc) and higher spending on rural area employment programme and other social services is conceivable as the principal route for jobs. If urban and rural, jobs anticipated could be quantified, the better it would be..
Higher public investment is viewed in global dialogue on finance as among ‘growth-friendly’ policies which can also be “inclusive” in terms of job creation. One implication is we can readjust fiscal consolidation sights for such growth policies so that growth can add to aggregate demand and consumption and revenue yields. Mr Jaitley has so far tried to play a fiscal purist to earn credibility and would now perhaps re-set his tune.
As foreseen by all except the Modi Government insiders shielding themselves from reality, the economically and socially disruptive demonetisation in November 2016, slowed growth in fiscal 2017 and, more tellingly, to a four-year low of 6.5 per cent in 2017-18. Both agriculture and manufacturing, real, productive sectors of the economy recorded sharp falls, according to CSO’s Advance Estimates for this year.
Taking the more realistic GVA (Gross Value Added), net of taxes on products, growth has fallen from the low of 6.6 per cent in 2016-17 to 6.1 per cent in the current year. It is the “lingering effects” of demonetisation and of botched implementation of GST, that had led IMF and other global agencies to revise down India’s GDP growth projections to a range of 6.2 to 6.6 per cent in 2017-18.
It is true that an improved growth rate at 7 to 7.5 per cent is projected by these institutions for fiscal 2018-19 on assumption of corrective reforms and better economic performance overall. However chastened by CSO data, Mr Jaitley can still opt for a GDP growth of 11 to 12 per cent (7 plus in real terms) which would be a definite increase in GDP after the low base in current year.
Much would depend on his revenue projections (with possibly a larger dependence on non-tax revenues and modest direct tax adjustments) while adhering to politically safer options. Explicit privatisations or scaling down of Government holdings (e.g. public sector banks) may be avoided among public sector undertakings. In other words, there can be no big bang approaches in the run-up to Lok Sabha elections.
A notable bargain for revenues could come from a newly-minted GST carrying the States, co-sharers, and it could become the hall-mark for the forthcoming Budget. But it is the Expenditure side which assumes greater importance in pre-poll times. Of the many demands on Mr Jaitley, claims of rural India would take precedence. And. Gujarat’s voters have signalled the distance its BJP Government had kept away from rural distress.
That cannot be the only area of concern. There are urban millions without jobs and that apart, the country is also seething with class and caste conflicts which are on the boil. These may have as much to do with lack of economic opportunities as the outcomes of clashes triggered in dominant community assertions. The Budget can at best seek to generate a sense of hope and satisfaction for all sections of the people.
Will the macro-economic situation which had worsened over two years move toward stability in 2018-19? The global outlook for India’s growth in 2018 is certainly not encouraging. Commodity prices, especially oil, are on the rise. Adding to the build-up of inflationary pressures at home with a less than expected agricultural out-turn, the more worrisome factor is the rise in oil prices to around 65 dollars a barrel. Any monetary easing from RBI can be ruled out in 2018.
India’s oil import bill would go up, even if the country’s reserves remain strong over 400 billion dollars) to manage payments and a rise in current account deficit. This is a reversal of the low oil prices providing a windfall to India for three years, helping Mr Jaitley to balance budgets better. Globally interest rates are hardening with US Fed having announced a further hike in December. US financial markets remain upbeat. Emerging economies like India may face the prospect of some capital outflows.
Whatever the fiscal limitations, Mr Jaitley’s budget cannot overlook issues of social empowerment involving higher spending on education, healthcare and a host of other basic needs of rural poor. It must include women where India’s rank, along with other social indicators, is among the lowest, lagging behind many poorer nations in Asia and Africa.
In the last 44 months, the Modi Government have neither secured domestic peace and social harmony nor achieved growth of the economy with promised order of jobs to restless youth – and these are elements that can be hardly ignored by a Prime Minister desperately seeking to crown himself for a second term. (IPA Service)