If the Modi government was expected to pull a rabbit out of the hat, it has not materialised till now. As for the market, it has shed the Modi-premium completely having retraced the entire surge after the new government came to power.
Despite this reality, if anyone was expecting the finance minister to perform magic, that expectation surely was misplaced. Arun Jaitley’s second Budget did very little to trigger a immediate bounce, or spur economic growth. The bits-and-pieces Budget seems to lack a grand design and turned out to be quite uninspiring at first glance — no major tax cuts to spur consumption, no big push for public spending to pump-prime the economy, or incentivise investments.
But if you pause to think, it might not be a bad decision to prioritise fiscal prudence at this point in time. Not all is well with the global economy; the Chinese slowdown continues to be a source of worry, while growth in the US is waning too. With global markets on tenterhooks, it is good to have some headroom for intervention in a SOS situation. Additionally, by keeping the deficit under control and limiting government borrowing – the net government borrowing for FY17 is estimated at 425,000 crore, which is lower than what analysts were expecting – the government has made room for a rate cut by the central bank. Bond yields have already dropped and the lower borrowing will allow the apex bank to probably further reduce the repo rate.
The biggest disappointment in the Budget has been the lower-than-expected allocation for bank recapitalisation. That is not an easy problem to solve but there are hints in the Budget in terms of how the problem of capital could be solved when the need (or the pain) is acute. Till that time, banks have to focus on house cleaning rather than go on a lending binge.
That only means one needs to reconcile to slower growth rates. Already the mood in the 11 clusters that our reporters visited for an on-the-ground view of the economy varies from sombre to despondent, barring the export hub of Tiruppur and the pharmaceutical belt of Hyderabad. Although the survey was done in the run-up to the Budget, sentiment is unlikely to turn on a dime after the passage of the finance bill. To know more, read through our special edition State of the economy.