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Perspective

Couldn't have been better
Given the constraints, the FY17 Budget is commendable

Deep Narayan Mukherjee

Difficult to improve the Budget: It may not be a very wise idea to look at the stock market closing to decide the quality of the Budget. The stock market yo-yoed since 11.00 am and finally ended up in negative territory. The day saw a 0.6% fall in benchmark indices (Nifty & Sensex). However, this is not an exceptional negative move. In fact, one may just ponder as to what were the market participants and commentators expecting from the Budget in the first place? Had they been the finance minister, and still remembered, that the Budget has to be balanced (revenue vis-à-vis expenditure) and keeping the fiscal deficit in check, how would they have designed it with any significant difference?

Maturity of fiscal decision making: This Budget may not go down in the annals of history as a dream budget. However, this Budget to an extent shows the maturity of the fiscal decision making process in India. In a world of negative interest rate and proliferating fiscal deficit this does means a lot. Of course as with any Budget, and why should this be any exception? There is a lot of expectation from the economy in FY17 which may be more than a tad optimistic. For instance, the FY17 fiscal deficit of 3.5% of nominal GDP is based on the expectation that nominal GDP will grow by 11%. In previous budget (FY16) the nominal GDP was expected to grow at 11.5% of FY15. However, now it is expected to grow at 8.6% in FY16. The nominal GDP has been falling sequentially since FY13 (FY16:8.6%; FY15:10.8%; FY14:13.3%; FY13:13.9%). In absence of any heavy-duty growth measures, it will be a very pleasant surprise if the FY17 nominal GDP growth is 11.0% as expected in the Budget.

Heart in the right place: Given the fiscal constraints, the Budget decided to focus on section of population which requires it the most - rural India and the economically weaker sections. Thus one sees ₹87,765 crore allocation towards rural development, a revival of MNREGA where the allocation is ₹38,500 crore and a sharp increase in rural road projects to ₹19,000 crore. This will breathe some life into the rural economy which is struggling after two bad monsoons. Measures like farm insurance and household insurance has the potential to improve the economic viability of agriculture/rural credit which may further promote growth.

Long-term positive signals for corporate India: While the tax rate for large corporates has not been reduced, the FM provided enough signals that the journey of simplification and rationalization of tax structure has begun. The introduction of the concept of presumptive income of 8% for businesses with revenue below ₹2 crore and taxing the same will potentially widen the tax net at the same time make it less onerous to comply with the same. In the long run such measures may turn out to be a master stroke.

NPA problem cannot be solved in the Budget: Certain market observers felt a bit of a heartburn as the FM allocated just ₹25,000 crore for recapitalization of banks in FY17. While the FM, of course made a commitment that more may be made available if the need so arises, some still feel this may not be sufficient. As such, estimates by various brokerage houses and rating agencies suggest that the Indian public sector banks require something to the tune of ₹200,000 crore in the next three years for recapitalization, if the Basel III norms are to be complied with by 2019. The government has allocated ₹70,000 crore over the same period. Thus if in today’s Budget, the FM had allocated, say, ₹50,000 crore (which is higher than the consensus expectation of the market) would it have helped? Would it have caused banks to trigger credit-driven GDP growth? Would banks have been amenable to lend to over-leveraged Indian corporates? The answer is possibly no!

To that extent, the cue provided by the FM about his willingness to reduce government holding of banks may be the correct way. Of course which private investor would like to buy banks struggling with bad loan issues at what price is a separate discussion all together. What banks require is immediate implementation of bankruptcy laws and/or a sovereign distressed asset fund, which will have special powers to liquidate assets. Banks NPA problem, if not solved has the potential to sink the entire economy. Expecting a high recapitalization amount in the Budget to fix it is like hoping cold-cream to cure skin cancer!

The author is a visiting faculty at IIM Calcutta. Views are personal.

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