The union budget for 2016-17 will be presented today by finance minister Arun Jaitley. Will it focus on the farm sector, job creation and eradication of poverty as indicated by the minister of state of finance, Jayant Sinha? Or will it emphasise fiscal consolidation or boost growth? It might well turn out that it is none of the above! It is highly probable that there might be no radical departures from the earlier budgets that he presented for 2014-15 and 2015-16. In other words, there might be large elements of continuity amidst a bit of change in his third budget speech.
Jaitley’s budgets are a work-in-progress. They recognise that the journey ahead is over a three-year period when there will be sustained growth of 7-8 per cent, lower inflation, lower fiscal deficit and a manageable current account deficit or imbalance in goods and services trade. The Central Statistical Organisation has taken care of the first objective. With 7.6 per cent GDP growth in 2015-16, India is one of the fastest growing economies. The latest Economic Survey estimates it at 7 to 7.75 per cent in 2016-17. The crash of 70 per cent in oil prices has taken care of inflation and the current account deficit.
JAITLEY’S budgets are a work-in-progress. They recognise that the journey ahead is over a three-year period when there will be sustained growth of 7-8 per cent, lower inflation, lower fiscal deficit and a manageable current account deficit or imbalance in goods and services trade.
That leaves only the fiscal deficit, which is another word for market borrowings. This arises when the government’s tax and non-tax revenues cannot fund its ballooning revenue expenditures on wages and salaries of administration, interest payments on past borrowings and subsidies. The government, therefore, has to borrow to meet this revenue gap as well as for funding capital expenditures to build more irrigation facilities, highways, ports and airports. The fiscal deficit was to gradually reduce from 4.1 per cent of GDP in 2014-15 to 3.6 per cent in 2015-16 and 3 per cent for 2016-17.
The fiscal goal posts, however, have moved forward. In the budget for 2015-16, the finance minister felt there was drastically reduced fiscal space and accordingly rolled the deficit targets over to the following year. The targeted 3 per cent deficit of GDP is to be achieved in 2017-18 than 2016-17. The three-year road map accordingly is 3.9 per cent in 2015-16, 3.5 per cent in 2016-17 and 3 per cent in 2017-18. His third budget today might well see another roadmap, considering the intense pressures to relax the targets to ensure the additional fiscal space funds much-needed infrastructure.
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This kick-start to higher public investment was in fact the big idea of the rail and budgets for 2015-16. The finance minister sought to boost overall economic growth over a five-year time frame through the building of roads, ports and railways. For the first time ever, the rail budget did not announce new trains or factories, but sought to substantially step up investments over a five-year horizon, to break the vicious cycle of underinvestment that has plagued this crucial infrastructure. The rail budget for 2016-17 also follows in this direction. Such investments are bound to have multiplier effects on growth.
Jaitley’s budgetary ambitions, however, have turned out to be unrealistic. The much-vaunted boost to infrastructure spending has not taken off considering the stress in the public sector banking system. The stressed loan pile is likely to hit Rs 8 trillion or $119 billion. Recapitalising banks is expected to be addressed in today’s budget. In his first budget, Jaitley mentioned that Rs 2.4 trillion was needed to be infused into these banks as equity as per Basel III norms. Does the government have such resources? Actually the requirement is much more. An additional Rs 1 trillion is required to repair balance sheets.
The available fiscal space cannot meet this requirement. Indications are that banks will be encouraged to raise this capital through the market. Dilution of government control thus appears inevitable subject to the limit of 51 per cent. There is no doubt that the government will continue to be the majority shareholder for a long time. There are bound to be pious announcements that banks will get greater autonomy and run on professional lines. Unless this problem is fixed, banks are unlikely to lend money for infrastructure projects that is the kick-start the economy needs to grow faster.
This infrastructure-led push also cannot succeed unless domestic and international investors are also on board. They may be seeing India with cautious optimism as they have concerns regarding the business environment and tax regime. Investor sentiment took a serious beating when tax authorities were given powers to reopen tax cases going back to 1962, enacted by the previous UPA Government. This was described as the ‘defining moment’ when investor sentiment turned hostile during the last years of the UPA government. They will be disappointed that this threat still exists on the books.
That will of course not prevent Jaitley from re-iterating the NDA government’s commitment to not resort to retrospective taxation. That the government commits to have a stable, transparent and non-adversarial taxation regime. More investments will take place only if the tax regime is stable and transparent. It is by improving the business environment that growth will be boosted. But will investors really have cause for cheer with the notice given to Vodafone by the tax authorities to pay its retrospective capital gains taxes (otherwise its assets would be seized)?
Last but not least important is the roadmap for the Goods and Services Tax. Will it become a reality in the face of political opposition in the Rajya Sabha? What are the prospects for other reforms like the bankruptcy legislation to go through? What is the likely burden of the 7th Pay Commission and one-rank-one pension award? The good news is that inflation has moderated. Non-Plan revenue expenditures on subsidies like diesel, LPG and fertilisers are also lower. The NDA government will, doubtless, resort to raise additional resources through partial sales of its share-holding in public sector companies. How all of this will enable him to set right the government’s finances and reduce the fiscal deficit or boost growth will be closely watched.
Author is an economics and business commentator based in New Delhi
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