A nip and tuck exercise

The widespread excitement, anxiety and anticipation built around the Union Budget every year is uncalled for and entirely misplaced. Budgets are statement of accounts of a nation and a plan for expenditure and revenue for the upcoming year. As such, these are expected to be broadly predictable if not outright boring. In a world of economic and geopolitical uncertainty, predictability and certainty of policy is underrated. In that regard, one needs to have some appreciation for Arun Jaitley’s fourth Budget. As such, the high points as well as the low points are things that the Budget has not done. The most commendable thing though is something that the government did not do. It did not resort to rampant populism with the intention to influence the outcome of the upcoming state elections.

Policy stability and macro signaling

The government has followed conservative practices as dictated by orthodox economics to remain on the path of fiscal consolidation. The fiscal deficit is targeted to be at 3.2% of FY18 nominal GDP, which is anticipated to be at 11% over FY17 (current fiscal) nominal GDP. While the GDP level may end up showing a downward bias, the government effort may get appreciative nods from the bond market and currency traders. To that extent, the rupee will remain strong, which is never a bad thing since India is a net importer.

Continuation of infra-rural focus

Given the constraints, clearly the government could not have gone over the top in terms of heavy spending on infrastructure or massive tax cuts to boost spending. The total expenditure on infrastructure spending is Rs.3.97 trillion and in keeping with policy continuity, it focuses on roads (Rs.64,000 crore), railways (Rs.1.31 trillion) and public internet (Rs.10,000 crore). The overall rural budgeted expenditure is Rs.87,765 crore, of which Rs.48,000 crore has been allocated to MNREGA, a scheme from the UPA which the NDA has adopted with sufficient checks to ensure that leakages are minimised. However, the Universal Basic Income, enthusiastically discussed in the economic survey of FY17, did not get referred to in the Budget.

Small carrot after a large stick

Bearing in mind the limits of the exchequer, only token gifts were provided to the middle class for their wholesome support to the demonetisation drive. Thus, for individuals with annual income between Rs.2.5 lakh and Rs.5 lakh, the tax rate has been reduced from 10% to 5%. Of course, an extreme saver, who after getting an annual salary of Rs.4.5 lakh will save one-third of the salary (Rs.1.5 lakh) in investment under 80C, the tax liability will be zero. For most other individuals it will lead to a reduced tax liability of Rs.12,500 - not something to kickstart a consumption revolution right away.

Now that most transactions would be ‘trackable’, the threshold for presumptive limit of tax exemption for small and medium entreprises has been increased to a turnover of Rs.2 crore from Rs.1 crore. SMEs, a lot of which were active, even if unwilling, participants in the cash economy, were provided with higher ease so that they can be tax compliant. For corporates with a turnover below Rs.50 crore, the tax rate has been reduced to 25% from 30%, which may actually give them a breather. Businesses of this scale often have low margins, given their uneconomic size and low bargaining power. At least some were viable solely because of low tax compliance. How soon will they adapt and survive in the new predominantly cashless and ‘trackable’ transactions needs to be watched.

Choosing stability over growth

The economic survey highlighted the threat of twin balance sheet problem that the economy is facing. This refers to “over-leveraged companies and bad loan-encumbered banks”. The implications being that companies will have low appetite to invest in capital projects and banks likewise will have a low appetite for boosting credit growth. Robust demand and supply of credit are a pre-requisite for investment-driven growth. The survey hinted that government-driven spend and formation of a Bad Bank called Public Sector Asset Rehabilitation Agency as possible solutions to the balance sheet issue. One will solve the demand side issue and the other the supply side issue of credit. The Budget makes some effort on one but is effectively silent on the other. In all likelihood, unless there is an economic miracle, the balance sheet problem may persist in FY18 as well.

Live to fight another day

The economic survey appeared like a trailer of a blockbuster movie, but the actual Budget, grounded in constraints, was not a blockbuster but a decent one-time watch. This Budget, per se, does not do much, in terms of preparing India for a world of heightened trade protectionism. There is a focus on skill development but a massive investment that may be required for developing human capital and readying India for a world of automation, 3D printing and machine learning is virtually absent.

It’s a Budget that somehow believes in a regular business cycle and one, that is possibly fully aligned to an environment of negative interest rates. Of course, by focusing on macro stability it can handle an emerging market pullout or two but then the balance sheet problem will aggravate. While all is not lost, the hope of “no further downside in global economy” continues to be a key untold assumption in the Budget.

The upside that one will look for is whether tax collections actually improve, given the measures such as ban on cash transactions above Rs.3 lakh and whether a shift from the parallel economy to organised economy leads to a higher formal ‘swachh’ GDP. If these two things happen, it would provide government the ammunition to fire a growth salvo in the FY19 Budget, while ensuring fiscal discipline. Thus, in the absence of any external shock, the economy is likely to meander along in FY18.

The views are personal. The author is a financial services professional and a visiting faculty of finance at IIM, Calcutta.