Jaitley’s Decisive Budget
This is Finance Minister Arun Jaitley’s last chance: the 2018-19 Union Budget, scheduled for February 1, will be Jaitley’s fifth Budget. With the Lok Sabha election due in April 2019, the next Budget could come under the model code of conduct if the complex parliamentary election schedule is announced in February 2019. No new schemes or tax cuts will be possible.
And yet, next month’s Budget, instead of providing Jaitley an opportunity to make radical changes in the tax code or implement other economic reforms, will restrict him to balancing much needed government spending with a looming fiscal deficit challenge.
The government’s decision in late December 2017 to borrow an extra Rs 50,000 crore over its budgeted borrowing of Rs 5.80 lakh crore has set the alarm bells ringing. The fiscal deficit target of 3.2 per cent of GDP could well be missed. It is estimated to climb to between 3.4 per cent and 3.54 per cent depending on how the government treats the new borrowing in its books. Jaitley though is sanguine. He has pledged to stick to his fiscal deficit target.
India’s GDP in 2018-19, the final year of Prime Minister Narendra Modi’s first term, is estimated at Rs 187 lakh crore. This is based on the Budget’s estimate of nominal GDP growth (including inflation) at 11.75 per cent in 2017-18. Extrapolate this growth rate to 2018-19 and we get GDP in March 2019, as projected above, of Rs 187 lakh crore. At the current exchange rate that translates into a GDP of $2.95 trillion. By purchasing power parity (PPP) Indian GDP in 2019 would be well over $8 trillion.
This focuses attention on the recent report by the Centre for Economics and Business Research (CeBR). The consultancy’s 2018 report says India’s GDP will overtake that of France and Britain in 2018 to become the world’s fifth largest economy behind the United States, China, Japan and Germany. The CeBR says India’s economy, growing at around 7-8 per cent a year, will overtake Germany and Japan by 2027 to become the third largest economy in the world. (By PPP norms, of course, India is already the world’s third largest economy.)
How will all this affect the two issues that could determine the fate of the Narendra Modi government in 2019: jobs and rural distress? The government is clearly worried about the voting trend in rural Gujarat which tilted towards the Congress in the December 2017 assembly election. Farmer distress, especially in Saurashtra, and the lack of jobs were the primary factors for the BJP’s poor performance. The Patidar agitation and Congress President Rahul Gandhi’s campaign rode this wave of discontent.
Fixing the rural economy will occupy Modi’s time and attention in the six-month gap he will get between April and September 2018 when campaigning for Meghalaya, Nagaland, Tripura and Karnataka would have ended and campaigning for Mizoram, Madhya Pradesh, Rajasthan and Chhattisgarh would not have begun.
The 2018-19 Budget will, like Jaitley’s previous four Budgets, err on the side of caution. Spending to spur jobs, especially in rural India, will be the main focus and that is where the extra borrowing of Rs 50,000 crore will go: agriculture, irrigation, rural infrastructure and healthcare. Will the extra money be enough to have a significant impact on jobs? Not by a long shot. While Mudra Bank with its plethora of small loans has created self-employed entrepreneurs in rural India, job growth in the formal economy remains tepid. The situation is worse in the informal sector which was hit by demonetisation and the introduction of the Goods and Services Tax (GST).
According to statistics released by the Labour Ministry on December 29, 2017, the organised sector created 4.16 lakh jobs in 2016-17. This is far short of the 10 million (100 lakh) new jobs India needs to create every year. A caveat though: the ministry’s survey covers only the organised sector which accounts for just 1.4 per cent of all enterprises.
The underlying problem of course, is that half of the Indian population (farmers) doesn’t pay tax. Of the other half, 95 per cent taxpayers contribute only a fraction (nine per cent) of total tax collected. That means just five per cent of India’s taxpaying population accounts for 91 per cent of total tax revenue. Unless this skewed tax base becomes more evenly balanced, India’s revenue-expenditure mismatch will continue into the forseeable future.
The government has meanwhile pledged to recapitalise the banking sector. Until banks get their NPAs under control, they will not lend freely to the corporate sector. Private investment will remain subdued. The reliance on government spending will grow.
Former Deputy Chairman of the Planning Commission Montek Singh Ahluwalia in a recent article, laid out several measures to overcome this endemic problem: “The Insolvency Bankruptcy Code (IBC) promises real progress in getting indebted large corporate entities to pay up their debts or surrender control. If a dozen of the large debtor cases sent to the National Company Law Tribunal come to a successful conclusion in the course of 2018, we should count it as a success even if the resolution involves large haircuts for the banks. Recapitalising public sector banks (PSBs) is essential, but what has been promised will only help to fill the hole in the balance sheets of banks. There is also no evidence yet of credible structural reforms that will change the way public sector banks function. Ideally, government equity in the banks should be lowered to under 50 per cent, at least for some PSBs to start with. The role of the finance ministry as an additional regulator, in addition to the RBI, must end.”
Jaitley announced recently that the government is likely to soon launch what it had promised in October 2017: recapitalisation bonds amounting to Rs 1.35 lakh crore to help public sector banks regain lending vigour. Simultaneously, the RBI will need to relax monetary policy and reduce interest rates so that corporate debt burdens ease, allowing the private investment cycle to regain momentum.
Modi will be watching carefully as Jaitley delivers what could be, electorally, his most decisive Budget.
