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Budget 2018-19: Economic odds stacked high

As govt struggles to stick to deficit target, it may focus on agriculture and infra, and policies with larger welfare effect

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It will not just be the upcoming elections casting a shadow over this year’s Budget. Revenue underperformance, possibility of a fiscal deficit slip, missing monetary stimulus due to a firm retail inflation rate, negative net exports, high global crude prices and a host of other such factors are likely to weigh heavy as the finance ministry drafts the Budget proposals for FY19.

Almost all economists are of the view is that the Budget – to be presented by the Finance Minister Arun Jaitley on February 1 – will focus extensively on the farm sector to spur rural demand.

D K Srivastava, chief policy advisor, EY India, told DNA Money that the government would look at agricultural schemes that were not “fiscally costly”.

“It could be something like an insurance scheme, which would be related to income rather than output because whenever farmers suffer from output and price shocks, either way, there is an income shock,” he said.

And despite the elections, the EY economist does not see the Budget relying excessively on giveaways. “There are state and general elections round the corner but this government’s inclination so far has been to not provide excessive giveaways. That’s a legacy the government will not leave”.

Arvind Virmani, former chief economic advisor (CEA) and executive director (ED) of International Monetary Fund (IMF) and current president of Forum for Strategic Initiative, said the government should look at rebalancing budgeted expenditure to boost GDP.

Economic growth had fallen to the lowest level of Prime Minister’s tenure at 5.7% in the June quarter of this fiscal. It bounced back in September quarter to 6.3%. The advanced estimate of the Central Statistics Office (CSO) has projected GDP to grow at 6.5% in the current fiscal. RBI’s outlook is slightly higher at 6.7%.

“Government must rebalance budgeted expenditure from subsidies-consumption to infrastructure-capital by reducing leakages (inefficiency and corruption) in the subsidy system, by replicating the successful shift of LPG subsidy to DBT (direct benefit transfer),” Virmani said.

Contrary to the popular view among economists that the government should deviate a bit from the fiscal consolidation path and marginally expand their fiscal deficit target of 3.2% of the GDP for the current fiscal to fund its increased spending, Virmani wants FM Jaitley to maintain fiscal discipline.

“I disagree with those that argue for financing an increase in government expenditure by exceeding fiscal deficit targets. In my view disinvestment targets should be expanded and achieved to meet temporary revenue shortfalls,” he said.

Srivastava feels fiscal slippage this year was inevitable because of revenue underperformance. He sees the government straying slightly from their fiscal target even as they resort to “some amount of expenditure reduction”.

“Perhaps, it (fiscal slippage) may become necessary because the government can’t cut expenditure excessively. The possibilities of revenue expenditure adjustments are limited and capital expenditure reduction will adversely affect the growth prospects. So, the choice is very difficult and the government might take a balanced view and try to combine low fiscal deficit slippage with some amount of expenditure reduction,” he said.

Finance ministry had recently announced that it would need Rs 50,000 crore more borrowings this fiscal to fund its expenditures. On Wednesday, it trimmed it to Rs 20,000 crore.

Richa Gupta, senior economist of Deloitte India, expects the government to extend the timeline for achieving its fiscal deficit goal of 3% of the GDP from next fiscal to FY20.

“They may not relax it completely. They may not deviate from the roadmap completely but may give themselves a little longer. For FY19, they could give themselves more flexibility and push the target of 3% for the fiscal after that,” she said.

One of the major reasons the government is likely to miss its fiscal deficit target this year is revenue underperformance because of hit from demonetisation, lower goods and services tax (GST) collections, lower dividend from Reserve Bank of India (RBI) and no income from spectrum auction. GST revenues have fallen from Rs 95,000 crore in July – the first month of the rollout of new unified indirect levy – to Rs 80,808 crore in November.

Though, economists expect collections to rebound next fiscal as GST compliance and RBI dividend improve.

“RBI dividend would go up again to Rs 70,000-80,000 crore and GST compliance will also improve. Both tax and non-tax revenues would be buoyant next year,” said Srivastava.

Virmani concurs. He said further tax reforms would enhance revenue growth on a sustainable basis in FY19.

“The best way to get a sustained rise in tax revenue is to simplify GST further, complete the promised corporate tax reform and undertake personal income tax reform,” he said.

Of the total disinvestment of Rs 72,500 crore that was budgeted for this fiscal, Rs 54,337.60 crore or 74.94% was achieved till January 11. Last fiscal, divestment goal was underachieved by Rs 14,253.42 crore or 25.22% with revenues from this source coming in at Rs 42,246.58 crore against the targeted Rs 56,500 crore. Gupta feels the government has done better on the disinvestment front this year compared to last year.

Since India is a net importer of oil, boiling international crude prices have fuelled fiscal trouble and are likely to do so next year. This aspect will call for more than number crunching in the Budget.

To counter the adverse impact of the rising crude prices, Virmani suggests, “The government must stick to the announced decontrol of diesel and petrol prices. The solar and unconventional energy policy and programmes should receive serious attention to provide correct signals to and ease doing business in this sector. Agriculture waste should be removed from purview of ECA (Excess Crude Account) and APMC (Agricultural Produce Market Committee) Act to facilitate use of crop stubble for energy production. Production and sale of electricity from all waste should be decontrolled and supported.”

Higher crude prices have already marred economics by driving retail inflation up to 5.2% in December and dashing all hopes of a rate cut by RBI.

According to Srivastava, the government did not have much in terms of monetary policy stimulus because of an elevated consumer price index (CPI) inflation.

“Therefore, government may have to rely relatively more on fiscal policy stimulus but there also they might come up with schemes that do not call for very heavy drain on government resources. So, they would try and combine policies that would not be fiscally very costly but would have a larger welfare effect,” he said.

For tackling the issue of negative net exports due to imports rising comparatively faster than exports, he suggested, “External sector needs comprehensive and coordinated reform of quantity restrictions, import tariffs and export duties. Distortions in agriculture Exim, textile imports and IT sector need to be removed.”

The trade deficit rose to three-year high in December as it widened by 12.3% due to rising gold and oil imports. In such a situation, Srivastava expects “domestic determinants” to play a larger role in economic growth.

“Domestic determinants of the GDP may have to play a larger role, particularly the sector called public administration and defence (PAD) and also local investment which is also looking up. Demand for investment might increase too. These two would neutralise the impact of negative net exports on the GDP growth,” he said.

According to him, another economic growth propeller that could be used by the government was infrastructure and construction spending in the Budget.

“Government has to simulate the economy by supporting agriculture, infrastructure and construction investment but it should be kept fiscally less costly. That would depend on the design of the schemes and could involve the private sector. That (private sector participation) would limit expenditure commitment (from the government) but would have a larger effect on the economy,” he said.

According to a recent Centre for Monitoring Indian Economy (CMIE) report, authored by Mahesh Vyas, total new investment proposals in 2017 were worth Rs 7.9 lakh crore compared to Rs 14.5 lakh crore in the year before.

Vyas said, “In the best case scenario these (new investment proposals) may be revised upwards to about Rs 10 trillion (lakh crore). Yet, this would be much lower than the Rs 14.5 trillion during calendar 2016 or Rs 15.3 trillion in 2015. In 2014, these added up to Rs 16.2 trillion.”

TIGHTROPE WALK

  • Economists say the Budget will focus largely on the farm sector to spur rural demand
     
  • Despite the elections, economists do not see the Budget relying excessively on giveaways
     
  • They say the government should rebalance expenditure
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