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Budget 2017: Will the Finance Minister bite the bait this time?

A Budget is essentially an instrument of fiscal policy of the state but it provides an opportunity to read the policy announcements of the government alongside facts and figures, as represented in the budget statements. Consistency is cardinal to policy.

Madhav Lal and Mandar Kagade    New Delhi     Last Updated: January 20, 2017  | 18:53 IST
Budget 2017: Will the Finance Minister bite the bait this time?

Madhav Lal (Left)and Mandar Kagade
It's that time of the year again! The Union budget is upon us, this time, somewhat earlier than usual. More significantly, it comes at a politically charged time. The "demonetization" experiment is still playing out and the state elections, including in the most populous state of UP, are slated only a few days after the budget presentation.

These developments have put the political economy context to the approaching budgetary exercise into sharper relief. The global scenario is also in a state of greater flux, and the inauguration of a Republican administration in the US, led by Donald Trump, has triggered speculations about its impact on international trade, capital movement and jobs in countries like India.

FULL COVERAGE: UNION BUDGET 2017-18

A Budget is essentially an instrument of fiscal policy of the state but it provides an opportunity to read the policy announcements of the government alongside facts and figures, as represented in the budget statements. Consistency is cardinal to policy.

Using that truism as a point of departure, we should seek to critique policy consistencies (or otherwise), between the government's pronouncements in the last more than two years on the one hand, and support for those pronouncements through Budgetary revenues and expenditure on the other. This being the penultimate budget of this government before the next Lok Sabha elections, there would be just enough time to deliver on promises to an extremely diverse set of stakeholders in rural and urban India.

FULL COVERAGE: RAILWAY BUDGET 2017-18

The much sought after economic reform of two decades - the introduction of GST - stands already deferred by at least three months. But given the fact that it must be effected in the upcoming year, the budget would be expected to reflect the impact of its implementation on both revenue and expenditure side. This will be closely watched by the state governments.

The budget will also reflect the true expectations of the finance ministry of the traction demonetisation will bring in expanding the direct tax base. The tax payer would no doubt like to see the promised lowering of tax rates, rather than only a routine raising of the exemption limit.

The rising crude prices will leave an overhang on the "fiscal headroom" available to the Government. In FY 2016, the government assumed the average price of crude to be $70 a barrel, and prices stayed well below that mark, enabling government to reduce the subsidy. This year that headroom appears substantially reduced, given OPEC's decision to cut production starting January 2017.

Notwithstanding a compelling list of expenditure demands, the government had committed to reducing the budget deficit below the current projected level of 3.5 per cent. Over the last one year, many have tried to build a case for deferring the cuts. With the lowered expectations of growth of GDP, (IMF cut India's growth forecast recently by a full percentage point  to 6.6 per cent), will the Finance Minister bite the bait this time, in the hope that higher government spending will provide the required impetus to the economy?

With a large part of the expenditures being committed, what important areas might the Budget 2017 target? Is the proportion of spending between infrastructure sectors and the social sectors likely to remain the same? What might there be in the budget to create jobs in the economy? Will the budget present any new approaches for the rural economy, where the bulk of India still resides? These are only some of the questions on people's minds.

Infrastructure is crucial for economic growth. Budget 2016 allocated a total of approximately INR 2 lakh crore to the infrastructure sector including about 97000 Crores to the roads sector. The governmenthas taken steps to revitalize the PPP space including by enacting the Public Utility (Resolution Of Disputes) Act ( a Bill was introduced last year) and Guidelines for renegotiating PPP Concession Agreements.

The Finance Ministry has prepared draft Guidelines for renegotiation but they are yet to be formally adopted. Though it remains to be seen how soon these intended measures will start providing the required fillip to the projects, enhanced spending on infrastructure will find resonance with impending priorities of communication and expansion of digital network.

This will be the first time that a separate railway budget will not be presented. That exercise is being subsumed in the Union budget with the expectation not only of greater accountability, but also of faster pace of reforms and capital injection. The spate of train accidents in the recent past has once again highlighted the crying need for upgrading existing infrastructure, and it will be interesting to see how the government balances such requirements with loftier goals like increasing private sector participation and of high speed trains.

Budget 2016 had allocated nearly INR 1.52 lakh crore for social sectors including education and health care. According to "IndiaSpend", a data-driven journalism venture that tracks policy,  the  money  allocated to centrally sponsored social schemes, ICDS, SSA and NHS declined by 10%, 7.5% and 3.6% over the last two years (as of March 2016).

This has come in for some criticism as the per capita spending on education and primary health care in India continues to be very low. In keeping with the recommendations of the Finance Commission, the Modi administration did indeed given a push towards more federalism by giving the states greater autonomy to spend the funds on major programmes.

However, despite this, spending continues to be low and, with few exceptions, the states have been slow in either leveraging the funds or dovetailing programmes for greater impact. Be that as it may, there continues to be a strong case for higher allocations in the Union budget for sectors like education and health.

The challenge of demography and job creation is nowhere more pronounced than in the rural areas, where the bulk of India still resides. Both on economic and political considerations, the allocations for the rural sector may only be expected to increase in the forthcoming budget from current year level of INR 87,000 crore, of which nearly half goes for MGNREGA.

Most people will be looking at the budget on what it gives for industry and job creation, and the extent to which it provides an institutional basis, benchmarking and road-map to further the ideas of Make in India, StartUp India and StandUp India. Despite the ambitious launch of these programmes, the manufacturing sector in particular, has remained sluggish.

A Labour Ministry Survey noted that India was able to add a mere 135,000 jobs in 8 labor-intensive sectors while the labor force grew by over 10 million.

The micro, small and medium enterprises, traditionally providing backbone and jobs in the economy are stated to have been badly affected in recent months in different parts of the country. It is, therefore, only to be expected that the budget addresses the requirements of these sectors through innovative programmes backed by resources and long-pending reforms in the labour sector.

Support for the models of the newly emergent "sharing economy" (like Uber), may also provide for innovations in creation of decent jobs in the semi-organised space. Consistent with the Modi administration's political push towards creating jobs and leveraging the population dividend, Budget 2016 allocated INR 1800 Crores to building 1500 Multi-skilling Institutes across the country.

The aim is to offer 2.4 million Indian youth employable skill sets.  The slow pace and manner of implementation of such programmes only adds to the challenges of the Finance Minster.

An unexpected stakeholder competing for funds may be the banking sector. India has agreed to phase-in Basel III accords that demand enhanced capital mandates of Banks. The "Indradhanush" scheme that the  Govt is presently implementing for PSBs has  earmarked INR 70000 Crores for recapitalization of  banks but PSBs  would still require an estimated  INR 1 trillion to be raised from the markets.

Banks are already reeling from the NPAs and stressed assets on their books, recognition of (at least some fraction) of the latter as NPAs will add to the capital demand. It appears that  the Govt will be required to underwrite a considerable fraction of  that INR 1 trillion+ capital need and  that will eat into the allocation pie diagram.

The jury will be out on these and other issues once the budget is presented. But it can be said that rather than expecting any path breaking changes on the expenditure side, what the Finance Minister presents by way of taxation reform to stimulate the economy, will be watched carefully by all.

(Madhav Lal is currently Executive Director at the Bharti Institute of Public Policy at ISB; Mandar Kagade is a policy analyst with the Bharti Institute of Public Policy at Indian School of Business)

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