Interim budgets preceding elections are more about future promises detached from financial realities
The interim budget of Finance Minister Arun Jaitley, likely to be presented in absentia, will likely be strong on optics and weak on numbers. Promises on bailing out the farmer community through direct transfers or loan subventions; benefits to smaller enterprises through tax rebates or interest subventions; relief to startups on angel tax; raising of the tax slab and upping deductions for individual tax payers could dominate the commentary. Much of this would be positioned as steps to address income security and for giving a fillip to job creation.
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However, none of these proposed measures—even if implemented in modified forms—post elections, if the ruling party comes to power, will offer any sustainable solution to the farmer income and job creation problems. Rather, these revenue expenses (or revenues foregone) will only push up the revenue deficit and exert pressure for containment of public sector capex, unless growth in revenues makes up for the increased spend.
As things stand, the signals on revenue growth don’t seem too encouraging. While GDP growth estimates by various economists and think-tanks seem to suggest that the next fiscal will see higher growth, many of the signals on the ground don’t seem as inspiring. In fact, even in the current fiscal, while growth is stated to be well over 7 percent, anecdotal evidence doesn’t seem to support such a number—perhaps it’s the numbers revision game.
Let’s take cues from what we see. Auto growth is in a sharply slower lane. In fact the numero uno carmaker, Maruti, posted weak numbers for the third quarter of the fiscal and hinted at a not so promising outlook. There goes iron & steel. Construction growth has also been dampened by a slump in the realty sector, where affordable housing is seemingly a bright spot, but for how long? Infrastructure spending helped keep cement demand firm, but a weaker fiscal may cap public spend. On the consumption side, over 60 percent of the folk who live in rural India aren’t likely to be having a great year given the low food prices and resultant agrarian stress. Even in urban centres, the mood isn’t upbeat. If consumer businesses were booming, advertising agencies would have been expanding. They are downsising. There is also no big hiring noted in most traditional sectors of the economy.
Where job growth is being seen is in the new age companies— read e-commerce, food-delivery, travel e-services and the like. But these are more like charitable organisations that expend more than they earn, and without the Softbanks of the world they’d be hardly bankable. Here lies a big risk. If the equity taps of venture capitalists and private equity players are turned off, several large, new age companies could sink swiftly, putting thousands of jobs in jeopardy.
Given the above anecdotal indications, the only bright spot seems to be IT services. It is one Indian sector with truly global revenues, impacted little by local economic factors. But the entire weight of the economy can’t be carried by one or just a few sectors firing.
What’s even more concerning, in light of this, is the move to extract funds from the reserves of public sector enterprises and regulators. As long as these reserves were out of reach and untouched, they provided a safety net for use in the case of an emergency. If these too are depleted and used to a large extent towards meeting revenue expenses, the consolidated balance sheet of the central government would weaken.
As it is, with GST collections expected to fall short of target this year, revenue growth is seen at sub 10 percent vs 10.3 percent CAGR over the past 4 years and vs 14 percent growth projected for the year (See “The Budget in Numbers”). This could see the fiscal deficit swell to 3.5 percent. And if we add off-balance sheet expenses of about Rs 50,000 crore (same as estimated by the Comptroller and Auditor General of India for fiscal ended 2017), the number would move closer to 3.7 percent of GDP.
In fact, in the interim budget to be presented this year, given the fiscal tightness, off-the-balance sheet financing could emerge as a key tool to keep the headline deficit numbers in line, along with deferment of expenses to the next fiscal. Thus, looking beyond and behind the budget numbers will be more important this year than ever before.