Indians have been dished out almost every kind of budget possible till date- the populist, the inflationary, the reformist, the growth oriented, the politically savvy and the market friendly. Arun Jaitley’s first full budget for FY16 was one that was not privy to getting contained into any of these formats. There was a definite vision that the FM and/or the PM and/or the NDA seemed to be finely tuned in to; the delivery of the budget seemed to suggest to me that the exercise was but one more step ahead towards a broader framework. This, to my mind is a big plus, though there were SO many things I wished he would have done differently. 6.5 out of 10 (and that too because I am feeling generous) for a budget I don’t know how to classify. Here’s why:
I have always maintained that the first thing to watch out for in a budget is whether the growth rate is realistic. That forms the backbone of budget analysis. Now, the 8.1% growth estimate on the GDP at market prices (at about Rs.106 lakh crores for FY16) seems to be a bit on the optimistic side. The moment we assume very high growth rates, we are assuming a robust tax income for the GOI. The Achilles heel of EVERY budget is that tax revenues are subject to realization of growth rates but expenses like subsidies and salaries take off like clockwork. Should we fumble on growth, the deficit widens maddeningly, or infrastructure spending takes a hit, propelling us into the well known higher interest rates and/or higher inflation or lower growth whirlpool.
The Finance Commission seemed to already have set pace towards a conservative fiscal deficit target. The Commission had given a target of 3.6%, which seemed to be restrictively oriented towards containing expenditure even when the underlying inflation numbers were so very benign. Apart from the Finance Commission, the rating agencies also seemed to be rather hawk toned about fiscal prudence targets. Now that itself is problematic, since a lower fiscal deficit target implies lesser spending and hence lesser growth. The Budget delivered by the Modi Sarkar does not go all the way upto the 3.6% target but does set for itself a 3.9% fiscal deficit target; the extra fiscal room of 0.3% that it gets will be completely used in terms of infrastructure spending. As I have been arguing earlier too, it is the quality rather than the quantity of the deficit that will matter. It is disappointing to my mind that of the 3.9% fiscal deficit target, 2.8% will get created on the revenue or operational side, leaving very very less room to spend on critical infrastructure.
The FM mentioned that he was spending Rs.70,000 crores more on infrastructure than the last fiscal. He also mentioned in the same breath that this definitely would not be enough. Even as he was talking, my mind went back to the basic GDP equation: GDP = C+ I+ G+ NX. This equation helps us to understand that the chief drivers of expenditures in an economic system are the consumers, the businesses, the Government and the foreign agents. Now, the very idea of a Governmental spending program is that you create growth and multipliers by emphasizing the G part of the story. But, the Jaitley budget seemed to be oriented towards a situation, where the Government would act not as the creator, but the enabler of growth. So, while G would not be spectacular, it would create frameworks for C and I to grow robustly.
Towards this end, a particular statement of the FM seems relevant. He mentioned that a controlled spending program of the GOI would propel us towards fiscal discipline, which would go a long way in keeping the inflation part of the story rock steady in this fiscal and this, if anything could prompt the RBI to cut rates to propel private investments. So, if he is pushing in Rs.70,000 crores over and above last year on infrastructure, he hopes that the rest will come in from the private sector or from PPPs, spurred by a cut in the interest rates.
However, there are FOUR issues here that trouble me. First, does a lower fiscal deficit always translate into lower inflation? In the past 5 years, India seems to have rather imported her inflation from oil and climate change and food and trade. I am NOT arguing that there is no case for fiscal prudence; but to assume that this necessarily will create a low inflation climate in India seems to my mind, a bit premature. Second is even more dicey. Will the RBI cut rates if inflation remains steady? Or will it choose a more medium term cautious stance by looking at climate uncertainties and oil corrections? Dicier (if there is such a word), does the reduction in policy rates pass through into a reduction in lending rates, given the issues with the monetary transmission mechanism? And the trillion dollar question, if at all we get a lower interest rate climate, is the industry going to quickly ramp up on its investments? If the IIP data is anything to go by, we are not really looking at a uber-excited industry. There are other nuts and bolts that will have to be tightened before the industry will invest more. Till such a time that we do not get clarity on land acquisition issues, environmental clearance issues, dispute settlement bodies for stalled projects, its highly unlikely that the industry will react massively to an interest rate cut. It has been assumed in the budget calculations that these links work, they work robustly and hence, even if the Governmental spending program takes a back seat, the monetary policy will work as a driver of growth for India. But, its been a while since we’ve seen robust monetary transmissions in India and hence I felt, that the budget was excessively positive on private sector participation prospects. This is where the FM loses yet one more point.
Another interesting (or perhaps plain spooky) aspect of the budget was the number of times he mentioned that he had less fiscal room since he was sharing so much more tax revenue with the states. But, is he? Now funnily, of the total revenue that the Center earns, around 62% gets shared with the states. This is in the form of taxes, grants and special grants. This year, of the total revenue he earns, he is going to be sharing about 64% with the states, which is only 2% higher as compared to last year. However, inside the 64%, he will have to share more in the format of taxes and lesser in the format of subjective grants. Now, if one only looks at the tax share, we get a feeling that the states are being 42% share in taxes this year as compared to 32% last year, which is one HUGE jump. But, actually, he will compensate higher tax share with a lower grants share and so, that way the fiscal room has not been compromised too much. Despite this, the underlying tone of bettered center state fiscal management was very much a part of the budget talk and I felt that the idea was that whatever is the shortfall in the infrastructure spending from the Center could be made good via much higher spending by the states (though how is an issue, given that their fiscal room has increased only on paper and in reality they are as fund strapped as before!)
The Economic Survey of India (ESI) released yesterday spoke about the vision of the GOI being one of “creative incrementalism”, and I think that set the tone for today’s budget in a macro sense. That growth will have to be created incrementally is a given, but perhaps the FM is trying to creatively get other sectors inclusively into the loop, rather than be the chief growth driver himself.
Despite all the above points, I think that there are definite points that are coming through as stylized initiatives of the NDA. The references to JAM (Jandhan, Aadhar and Mobiles) as a way of targeting the subsidies better, the increased focus on women or the girl child, huge mentions of Swachh Bharat as not only a sanitation scheme but a bigger health program, the emphasis on affordable housing for the people, jobs for youth, insurance for all, higher benefits for old age security all seemed to be moves in the correct direction. There has been concentrated effort on a few of these flagship schemes and the budget did its bit to re-iterate that commitment financially.
So, was this populist? No, definitely not. Was this growth oriented? Umm, in a limited way. Was this politically motivated? Naah, no. From a macro policy perspective, its a budget that really delivers a mixed bag. Hopito ergo sum. I hope, therefore, I am.