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A Budget Against a Bleak Backdrop

The Budget that Finance Minister Arun Jaitley presents on February 1, 2017 will boast of several firsts.

twitter-logo Prosenjit Datta        Last Updated: January 23, 2017  | 14:23 IST
A Budget against a Bleak Backdrop
File Photo: Reuters

Prosenjit Datta, Editor, Business Today
The Budget that Finance Minister Arun Jaitley presents on February 1, 2017 will boast of several firsts. One, it will be presented a month in advance from the conventional February 28, the date on which all budgets so far have normally been presented. It will also be the first budget, which will have the Railway budget merged with it. And finally, it will be the first budget to do away with the Plan and Non-Plan expenditure convention and go instead with just revenue and capital spending plans.

Because it has been advanced by a month, it will also not have the benefit of the full third quarter economic data of FY 2016-17. Much of the data it will bank on will be the first and second quarter data that has been released by the CSO, and of course, some data that has come in for tax collections etc.

In all probability, when Finance Minister Arun Jaitley rises to present the budget, on few of the effects of the surprise demonetisation of Rs 500 and Rs 1000 notes by the Prime Minister will have been captured formally. Much of the data that the CSO will have captured, will be till the end of September 2016, and therefore will not show any demonetisation effect.

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At any rate, the finance minister has said that demonetisation has not hurt the economy at all - and has presented higher than expected numbers of tax collections to bolster his point. He has said that direct tax collections for April - December 2016 were up 12.01 per cent while indirect tax collection was up by a whopping 25 per cent, over the same period of 2015. While those numbers seem impressive, a number of tax experts have said that unless the detailed numbers came in, it was not possible to say whether there was a slowdown or not. Mukesh Butani, managing partner and non executive chairman of BMR Legal for example had pointed out that because of higher crude prices, excise collections on crude would also be higher - and may explain some of the higher indirect tax collections. Similarly, he had said that it was not clear whether the direct tax collection figures included the figures of the instalments paid for the IDS or not.

At any rate, while the finance minister has made much about the tax collections, a number of indicators show that the economy is perhaps not in as good a shape as the government would like to paint. Take these figures for example. Gross NPAs  (as a percentage of gross advances) of commercial banks at the end of the quarter ended June 16 stood at 8.27 per cent - or twice that of the quarter ended June 15 figure of 4.59 per cent. It had been growing every single quarter. Index of Industrial production (IIP) figures for Apr-Oct 2016-17 figures were negative compared to the same period the previous year. Mining, manufacturing, capital goods and non durables all showed a fall, with the capital goods scene being the worst. Imports - both oil and non oil - have been falling persistently.

Source: CMIE

Index of Industrial production (IIP)

Source: CSO

Meanwhile, other figures are only now trickling in. Auto sales have tanked post demonetisation. So has new housing unit sales. Over the next month, figures of other industries will come in as well.

The point of this column is not to argue that demonetisation was a bad exercise. The limited point here is that when the finance minister rises to present his budget, he must understand that the overall economy is not in a great shape - and some of the problems had started much before the demonetisation exercise. When he presents his budget proposals, he needs to focus on how to make the economy start growing faster once again... and address some of the problems such as growing NPAs, low capital formation, low credit demand, and low investment appetite. If he does not take a realistic view of these and come up with incentives to address those issues, we will be looking at another bleak year in terms of the economy.

Merchandise Exports and Imports (in Rs Crore)  

Source: Ministry of Commerce and Industry

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