BUDGET EXPECTATIONS. Economics or politics? It’s a toss up for Jaitley

Whether Finance Minister Arun Jaitley delivers a hit in his most critical Union Budget (2018-19) will be known on February 1, but if economy watchers are to be believed Jaitley has a weak script to deliver from.

Jaitley, who faces challenges like finding means to rein in the fiscal deficit, volatile crude oil prices, creating jobs, boosting the rural economy including farmers’ distress, will also have to keep in mind the looming State elections. The after affects of this Budget will also resonate in the General Elections next year.

Direct tax collections are still muted, while Goods and Services Tax as well as banking reforms are yet to deliver the desired results.

Read: Economy - A Report Card

“Since 2014 all decisions of Jaitley have been to heal the wounded Indian economy. He has been doing a balancing act between politics and economics in his successive Budgets. But, for this Budget he may have to take a clear position — politics or economics,” says a public policy commentator.

Those who claim to know Jaitley believe that this Budget will cater to the rural economy and also offer political stimulus for the States that go for polls.

“Both fiscal deficit and oil prices are a concern. Besides, GST revenues are taking longer than desired. If all these were under control, the government would have had more money to address the farm crisis. Also, low GDP numbers are not good for any economy,” acknowledged a BJP member.

So, what will Jaitley’s Budget talk about? Will he play to the gallery or will he keep a firm grip on finances? Will he keep his promise of lowering corporate tax rates? Will he fix responsibilities?

Those wanting to second guess Jaitley say, the Budget could be conservative.

Aashish Chandorkar, public policy commentator, summarises the Budget-2017 as largely apolitical and defensive. Jaitley had promised big infrastructure spending in the wake of demonetisation and the government stuck just to it. “Only big disappointment is that the announcements related to the agriculture sector have not translated to big action — be it the e-NAM or irrigation focus,” he pointed out.

Strengthening of rural economy, more role for MSMEs and encouraging banks to increase rural spending, seem to be the buzz words for this Budget. While the focus on manufacturing and exports will remain, means to create employment in rural areas by using skill development as a tool, solar power, irrigation, and addressing other agriculture aspects could feature this time, said an official.

“There could also be some fixing of accountability. For example, the projects like Smart Cities have not really moved forward because of inaction by States. The Budget may see setting of targets or timelines for results,” indicated another official. But, the biggest challenge is job creation. “Even if the competing datasets present inconsistent jobs picture, the need for more as well as better quality jobs cannot be wished away. For example, MUDRA related jobs data has been really badly called out. Skills India should have always been jobs linked,” argues Chandorkar.

The weakest link in all the economic development has been the banking sector. Though the government has been talking about reforms and taken radical decisions on dealing with non-performing assets and liquidity issues, the results are yet to be seen.

“The rate of formation of new NPAs seems under control now. But there’s the stock problem to address. That will take its own time with the Insolvency and Bankruptcy Code resolutions going on as per a calendarised approach,” said Chandorkar.

Fiscal deficit Should Jaitley give importance to fiscal deficit? The opinion is divided. Some economists and Finance Ministry officials believe breaching it should not be a concern, while there are others who believe that it is important.

Fiscal deficit is important because it decides the borrowing size — the more you borrow there will be higher pressure on interest rate, which, in turn, will crowd out the private sector. And if borrowing is higher, the debt accumulated will be more, impacting the spending.

“Fiscal deficit has to be addressed head on. Either the government ignores the fiscal hawks, rating agencies and commentators and takes a political decision to present an electoral Budget or it sticks to the 3.2 per cent target. Trying to do something, which results in 10-20 bps miss will be detrimental to both constituencies. Jaitley should ensure he takes a firm decision either way,” says Chandorkar.

Should Jaitley worry about the GDP numbers which has been estimated at 6.5 per cent for 2017-18, lower than the growth of 7.1 per cent of the previous year ? According to Vice-Chairman NITI Aayog, Rajiv Kumar, the GDP growth will become more robust in 2018-19. He argued that the second half GDP growth in 2017-18 has risen to 7 per cent bringing the annual growth rate to 6.5 per cent.

Kumar pointed out that economic activity has been picking up over the last three quarters and can be expected to strengthen in the coming period with the manufacturing PMI now reading at a five-year high of 54 per cent, and FMCG demand picking up briskly.

Oil prices Oil is what Jaitley should be worried about. “This government should get credit for putting in place good, concrete long-term thinking in place to gradually reduce oil import dependence (solar power, electric vehicles, new refineries, strategic reserves). But, unfortunately 2018 will be a difficult year for the government. Global political instability is on the rise.”

“Every $10 a barrel price increase leads to 0.1 per cent fiscal deficit increase and 0.4 per cent current account deficit increase for India. A 10 per cent price rise hurts GDP by 0.5-0.6 per cent as per various estimates. So the Budget has to take an average through the year oil basket at $75-80 and model the numbers accordingly,” says Chandorkar.

The price at which Indian refiners buy their crude oil stood at $66.13 a barrel on January 5 and the average price from April 2017 till date stood at $53.82 a barrel. Industry trackers, who love to bet on oil, feel that Jaitley will keep it at $65-70 a barrel.

The ideal situation would be to have a GST rate for petroleum products. But that remains a distant dream. Therefore, the alternative before him is playing with excise duty or crude oil cess. In October 2017, the government had reduced the basic excise duty on petrol and diesel by ₹2 a litre, a revenue loss of ₹26,000 crore for the Centre for the whole fiscal.

Tax rates are a critical component of any Budget. “In a political Budget, direct tax cuts are the first call of signalling. However, the government is facing lower-than-expected GST receipts, telecom licence fees, and RBI dividends. So while ideally Jaitley would have liked to reduce corporate tax rates, the wiggle room isn't very high. Maybe it will happen in 2019, just before the election,” says Chandorkar.

Whether politics will overrule economics or vice-versa only Jaitley knows, but he will have to take a position.

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