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India cannot rule out a pause in its fiscal consolidation plan in the year through March, Chief Economic Adviser Arvind Subramanian has said in the Economic Survey presented in Parliament on Monday, setting the government’s tone ahead of Thursday’s union budget.
“Setting overly ambitious targets for consolidation — especially in a pre-election year — based on optimistic forecasts that carry a high risk of not being realized will not garner credibility,” the survey said.
Sovereign bonds extended decline, with the yield on benchmark 10-year notes rising by four basis points to 7.35 per cent as of 1:43 p.m. in Mumbai. The rupee declined 0.1 per cent to 63.5775, while Indian equities extended gains on optimism over strong growth projections in the economic survey.
In the budget presentation, Finance Minister Arun Jaitley is expected to strike a balance between giving incentives to taxpayers before 2019 national polls and reassuring rating companies looking for an improvement in one of Asia’s widest budget deficits. It is the government’s last full budget before PM Modi seeks a second term in national elections next year.
The economy is expected to grow at 6.75 per cent this year on the back of a recovery in second half of the year, today’s annual report said. It sees the gross domestic product expanding to about 7-7.5 per cent next financial year and warned economic management will be challenging in the coming year due to the overall economic and political background.
In the first eight months of the year, the fiscal deficit reached 112 per cent of the target, largely because of a shortfall in reduced dividends from government companies, the survey said, noting higher-than-estimated revenue from asset sales would partially offset this. The government’s effort to seek more dividend from the central bank is said to have failed.
The effects of an unprecedented ban on high-value currency notes in November 2016 and new national sales tax GST in July — which pulled growth down to the levels seen before PM Modi’s election in 2014 — appear to be receding, the survey said. It projected a rebound in private investment and exports, but cautioned persistently high oil prices remain a key risk.
“A pause would imply a fiscal deficit target similar to last year, that is 3.5 per cent of GDP,” said Sonal Varma, chief India economist at Nomura Holdings Inc. “The reason for a pause is primarily a structural reform like GST.”
Most economists in a Bloomberg survey published last month predict PM Modi will keep the budget gap target for the year starting April 1 unchanged at 3.2 per cent of GDP. That would mean a pause as the government had earlier pledged to lower the deficit to 3 per cent.
The survey pegged GDP growth at 6.75 per cent in the current year — the lowest since Modi came to power — and 7.5 per cent next year. The government is scheduled to publish its second advance estimate for this year’s GDP on February 28.
The government’s policy agenda for coming year would be to support agriculture, stabilize GST, finish resolution and recapitalization, privatize Air India and head off macro-economic pressures, Mr Subramanian tweeted.
One interesting statement CEA Arvind Subramanian has made in the context of the survey is that the Narendra Modi-government doesn’t need to go for new announcements and schemes. Instead it should focus on continuing with the work it has begun already. “My own view is that the government. doesn’t have to do anything new or radical. They should finish what they started out. They should stabilise the GST. Finish privatising Air India. Head off macro-economic pressures and possibility of a sudden stall from rising oil prices and sharp correction is stock prices,” Chief Economic Advisor Arvind Subramanian said commenting on the survey (read a Hindu report here ). This statement is important given the penchant of the Narendra Modi government to announce headline making schemes in every Budget. The chances for that are, of course, higher in an election year and considering that this is the last full Budget for this government. It is fair advice but not enough to take the economy to next level of reforms which are critical.
Union Finance Minister Arun Jaitley would do well to ignore this particular recommendation and go for a bold, reformist Budget. By telling the government that it doesn’t need to go for anything radically different, CEA Subramanian has instantly tempered expectations from Jaitley on Budget day. This is also a bit surprising given that this Budget is where Jaitely could actually think of doing something different for two reasons.
One, with GST in place, the Budget saves lot of time for him to explain changes in the indirect taxes and use that time for something else. Second, the government just announced a major economic stimulus amounting to Rs 9 lakh crore targeting infrastructure and banking sector push. Typically, such announcements too come in the Budget. This leeway for Jaitley in the Budget actually opens room for an innovative Budget. Jaitely’s Budget would be remembered as reformist if he could use the document to lay a detailed roadmap for something radically different.
For instance, the Budget this time could do away with unwanted directed lending obligations every Budget imposes upon state-run banks, mainly ever-increasing targets on farm credit. It will be a politically-sensitive decision, but a needy one. At a time when contribution of agriculture to GDP has come down to 15 percent from about 50 percent at the time of Independence and the real problems plaguing the sector is inefficiency, irrigation, storage, marketing and sale of produce, the government is solely focused on directing banks to keep increasing lending exposure to the farmer, pushing him often to over-indebtedness. Jaitley shouldn’t lose an opportunity to end the practice of directed lending to agriculture in the Budget. Instead, the government can transfer any money it would want to transfer to the farmer directly to his bank accounts, now that the Aadhaar-bank linkage infrastructure is present.
Another area where Jaitley can turn this into a reformist Budget is by charting a roadmap to sell off loss-making PSUs, another bold and politically-risky decision. Even in the banking sector, where consolidation has been a big talk point for several years now, nothing much has happened so far except the merger of the State Bank group, which is more technical in nature. Jaitley can use the Budget to announce a blueprint for monetisation of loss-making PSUs and merger of PSU banks.
This time, the Budget doesn’t need to be populist despite the pressure on the government to do so in an election year. This government has done enough to bring the poor into the mainstream in terms of schemes and policies, and the Budget needn’t be a tool for that. Jaitley has a golden opportunity to present a bold, reformist Budget, something that’ll set the course for the economy for the next decade or so.
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