Finance Minister Arun Jaitley will present the Union Budget for the full year, 2018-19, on February 1. This will be his last before the general election, due sometime before May 2019. Given the advance of the Budget presentation, from the last day of February to the first of February, with the objective of having the nod of Parliament before the actual start of the financial year, the estimates and the actual revenue and expenditure figures in the budget statement for the full year, henceforth might be closer to the reality. This is to be welcomed. But, the task of Jaitley is far from easy.
He has a tough job meeting the expectations of the voters as well as of the economic pundits and investors who keep a keen eye on the twin deficits, if any. With the fiscal targets for the current year already having come under pressure due to the impact of GST and the lingering effect of demonetisation, it will be hard for the finance minister to stick to the 3.1 percent target of the GDP for the fiscal deficit. Multiple pressures on the fisc have engendered a feeling among foreign investors that in spite of the belated effort to rein in the expenditure, the limit may already have been breached. One indicator is the intense pressure on the banks to contain the losses on the rising bond yields.
There has been a sharp spurt on the 10-year government paper, from about 6.5 percent in the last quarter to 7.56 percent a couple of days ago. As a result, the cumulative loss of the banks exceeds Rs 15,000 crores. With the banks still struggling with the huge problem of non-performing assets, the additional blow on account of the steep rise in outgo on Indian government bonds can shatter their effort to rebuild their balance-sheets. Thanks to notebandi, banks are holding large amounts of un-remunerative cash while the credit to business and industry has failed to pick up. Unless the credit off-take picks up in the near future, banks are set to face difficulty balancing their own accounts. The promise to recapitalise banks by the finance minister is bound to be difficult unless the additional losses on government bonds is neutralised.
This is not the only obstacle in the finance minister’s path to present a please-all budget. As the recent Gujarat poll underlined, rural distress is a country-wide problem. It needs to be addressed urgently in the interest of the ruling party itself. It will like to go into the next Lok Sabha poll offering something tangible to the large section of the voters suffering from the below-the-cost yields on farm produce and an ever-growing debt burden. Of course, the States will have to contribute to any solution that the Centre might devise to relieve the misery of farmers, but the focus will be on Jaitley’s Budget for evidence of financial allocations and subsidies for the rural areas.
A drop in the growth rate and the sharp fall in the post-GST revenue collections in the last quarter are grim reminders of the difficult task the finance minister has on his hands to keep everyone happy. Besides, the vocal middle class cannot be abandoned when it comes to tax sops. Reports that the budget may offer income tax cuts to the middle-income groups are hard to believe in view of the tight finances of the government. Given the sharp spurt in the global crude oil prices and commodities in the recent weeks, the government no longer has the option to reduce levies on the petroleum products. In fact, in recent weeks the retail price of diesel, which widely impacts inflation, has reached a record high.
Fortunately, the wholesale prices are still in the safe territory, though the consumer inflation, particularly in the food and vegetable segment, is skimming the danger mark. All in all, we find it hard how the coming offering of Jaitley can be a please-all effort, though how the share markets will react cannot be predicted, given their near-autonomous behaviour unmindful of the actual state of the economy.