Prime Minister Narendra Modi likened the 2016-17 budget to an important examination he is hoping to pass. Why is Modi according so much importance to this budget? Possibly because both the PM and finance minister realise that the NDA government had lost about two years already and the economy has not shown any significant uptick even as most parameters – rural incomes, agriculture output, average sales turnover of top 500 companies, exports – are in negative growth mode. It is against this difficult backdrop that the finance minister presented the 2016-17 budget.
Politically, Modi wanted to send another crucial message – that he would like to be remembered as a PM who did something for the distressed farmers and the rural poor. And he would not want to be remembered as one concerned only with big business-driven growth. One could argue that he has passed the preliminary test because the budget succeeds in creating the optics that the NDA cares for Bharat. He does this through a slew of schemes for the rural poor, such as cooking gas for several crore households below the poverty line, more allocation for farm infrastructure, an institutional ecosystem for Dalit entrepreneurs, subsidised health schemes, including medicines and so on.
So the budget is full of good intent. However, one would like to add a big caveat. Creating optics can be risky as many PMs in the past have failed to follow up on promises. Also, a pro-poor economic vision cannot be implemented in a vacuum. For instance, an institutionalised ecosystem for Dalit entrepreneurs cannot ignore how bright Dalit students are treated in universities, as we have witnessed in Hyderabad recently.The political economy of the budget therefore can only be located in the kind of larger politics the BJP and its ideological mentors spawn in the country.
Political messaging aside, the overall budget presented by Arun Jaitley looks like a reasonable holding operation as the FM himself warns that the global economic conditions are very uncertain with experts forecasting a possible world recession. This is against the backdrop of China slowing down even further and choosing to devalue the yuan at some point of time.
So however much the NDA attempts to shore up the economy by heavy public investment in infrastructure, the risk of exogenous shocks will always be there. Again, it is partially to shore up the economy against externally induced shocks that the FM resorted to the optics of pursuing an aggressive fiscal deficit target of 3.5% of GDP. However, later in his press conference, Jaitley’s explanation sounded a bit tentative about the necessity of adhering strictly to 3.5 % of GDP as fiscal deficit. He indicated that an expert committee will give a fresh road map and we may “look at a range” to observe fiscal discipline.
There are other hidden factors which suggest that the fiscal target for 2016-17 may be a bit difficult to achieve in a year of tepid growth. The growth forecast remains at last fiscal year’s level – 7 to 7.5 %. Also 2016-17 will see a much higher funding commitment towards the Seventh Pay Commission award and OROP-related expenditure which is not fully provided for. To that extent, the fiscal deficit may be understated.
The other challenge for Jaitley will be that he has no room to slip up on revenue collections in 2016-17. In fiscal 2015-16, the FM was lucky that he could raise an additional Rs.1 lakh crore through higher petrol taxes which became possible because global oil prices collapsed by over 70%. He will not get this additional windfall next fiscal. On the contrary, he will feel somewhat trapped if oil prices move up 40 to 50%, which is not outside the realm of possibility. In that event, he will be forced to cut oil taxes, rather than raise retail prices of oil from the present levels. Of course, the finance minister has hinted that he could get a bonanza from the new voluntary disclosure scheme in which black money will be converted to white on payment of 45% tax. But many doubt whether this will be a big success. There is also doubt whether Rs. 5 lakh crore of money locked in tax disputes can be partially unlocked through mutual settlement. So there is a question mark over these sources of additional revenue during the year.
The budget has also angered the salaried class by proposing to tax 60% of all PF, EPF withdrawals for contributions made in future. Earlier these withdrawals were not taxed at all. Overall, the middle class hasn’t gotten much from the budget. It is also possible that Modi wants to politically signal a pro-rural bias and therefore there isn’t much for the urban middle class.The promise of doubling farmers’ income in fove years is quite ambitious. One only hopes it doesn’t go the way of the PM’s original promise of delivering farmers a support price which is 50% over their cost of production. It will take a lot for the farm sector to recover from its present lows. Agricultural income growth has been close to zero in the two years of the NDA. The government is now trying to compensate for the neglect of the agriculture sector.
One also expected a more comprehensive road map for the recapitalisation of PSU banks, which remains the most serious hurdle to reviving private investment. Experts say PSU banks need over Rs. 4 lakh crore of capital in three to four years. The allocation of Rs.25,000 crore for recapitalisation of banks is totally inadequate. There is some talk that the RBI will be asked by the finance minister to provide a substantial share of bank recapitalisation just as the US federal reserve did for American banks in 2009. One doesn’t know how Raghuram Rajan will respond to this suggestion.
Finally, only time will tell whether the ambitious proposals set out in the budget will succeed. The optics of politics is one thing, the details of implementation will really hold the key. Especially with regard to the revival of agriculture growth and rural demand – the biggest challenge facing the NDA.