6
and fiscal consolidation. This, we believe, will act as the
necessary catalyst to improve economic growth, while
keeping the economic foundation strong. The Union Budget for
FY18, therefore, reflects the government’s firm commitment
to substantially boost investment in rural/agri sectors, the
infrastructure and on employment generation, but with
simultaneous focus on reducing the fiscal deficit.
The finance
minister was able to achieve the fiscal deficit target for FY17 of
3.5% of the GDP and projected the FY18 fiscal deficit number at
3.2% of the GDP. While this is higher than the earlier projection
of 3% in the FRBM roadmap provided, it is lower than the
market expectation of ~3.3%. The government felt that marginal
digression (while keeping the fiscal deficit percentage lower than
previous year) in the current year was justified given the need for
increased investments. Moreover, the government has acquired
more credibility on meeting its fiscal deficit targets, after posting
steady and consistent improvements in the fiscal situation for
three consecutive years. The central government’s fiscal deficit
had declined from 4.5% of GDP in FY14 to 4.1%, 3.9%, and 3.5%
respectively in the following three years. The Finance Minister did
state that the government remained committed on bringing the
fiscal deficit to 3% of the GDP in FY19. Given the fast changing
global scenario, the uptick in oil prices and the need for India to
improve its growth quotient, the budget seemed to be focused
on catalysing growth, boosting the rural economy, improving the
ease of doing business and generating employment.
The key
element of the budget was that the government did not bring
in any disruptive changes or policies, and the focus was on
improvement and expansion of existing policies with strong
execution.
The total fiscal deficit for FY18 was pegged at
R
5.46 trillion,
or 3.2% of the GDP, as against 3.5% in FY17. Most of the
major estimates on the expenditure, revenue receipts
and capital receipts looked credible.
Also, tax revenues
are expected to grow by 12.2% YoY to
R
19.1 trillion and by
12.7% YoY (tax revenues net to centre) to
R
12.2 trillion, on the
back of a broadening of the tax base, improved corporate/personal
income tax collection, along with an 11.8% projected growth in
nominal GDP. GDP growth is projected at 6.75-7.5%, as per the
economic survey of FY18. The total tax-to-GDP ratio is projected
at 11.3% in FY18BE*. The key monitorables would be as to how
the tax-to-GDP ratio improves going forward, as it would give more
fiscal room to the finance minister to push up investment spending
in the economy.
We think that the key to managing the fiscal
deficit number would be the government’s ability to go ahead
with the planned sale of securities/disinvestment to the tune of
R
725 bn—as against
R
455 bn in FY17RE*—spectrum receipts
of
R
443 bn and managing the current subsidy burden on food,
petroleum and fertilisers, which is at
R
2.43 trillion (against
R
2.32 trillion in FY17RE). With a lower-than-expected fiscal
deficit and lower net borrowing targets (of
R
3.48 trillion), there
are expectations that the interest rate regime in the country
could remain accommodative, which would be a catalyst for
higher investment and capex activities.
The finance minister went on to present the Union Budget
for FY18, against a backdrop of mixed economic conditions.
On the one side, the economy was gradually coming out of
demonetisation which had impacted economic activities for two
months, producing a negative effect on the country’s near-term
growth trajectory, especially the rural economy. Thus, there were
expectations of some sort of stimulus to boost economic activity.
On the other hand, the government was progressing steadily on
the fiscal consolidation path, and hence, there were expectations
that the lower fiscal deficit roadmap would be adhered to, in order
to qualitatively improve the long-term structure of the economy.
There also was heightened clamouring for the government to
spend more on quality capex (read ‘infrastructure’) so as to revive
the overall capex cycle, create more jobs and boost economic
growth. A look at the GDP data also suggests that while private
consumption, net exports and government spending have been
doing reasonably well, what has been lacking is gross fixed capital
formation (GFCF); and one of the reasons for this is low capacity
utilisation in the industry, which inhibits it to expand further. Also,
improvement in infrastructure is key to driving the government’s
flagship programmes like Make in India, Digital India and Startup
India. Therefore, there were expectations that the government
would continue to cut the corporate income tax rates and also
give more investment incentives to the private sector. Hence, the
budget had to work at the demand for stimulus, while maintaining
focus on containing the fiscal deficit.
The economic survey released a day prior to the budget
projected that the GDP growth for FY18 could range between
6.7–7.5%, which would still make India amongst the fastest
growing economies in the world. It also highlighted that since
the decline in oil prices from their peak in June 2014, there has
been a boost in incomes, which combined with government
actions imparted dynamism by increasing private consumption
and facilitating public investment.
This helped in reviving an
economy buffeted by the headwinds of weak external demand and
poor agricultural production. It was felt that this windfall could be
negatively impacted with rise in oil prices during the year. There also
were concerns on the changing international order, particularly in
terms of Brexit and the new administration in the USA. Moreover,
the economic survey raised concerns on weak private investment
because of low utilisation and high leverage which have been the
economy’s weak point for several years now. Re-establishing
private investment and exports as the predominant and durable
sources of growth is the proximate macro-economic challenge.
Therefore, the steady progress on structural reforms made in
the last few years needs to be rapidly built upon with further
reforms. After demonetisation and given the ever-present late-
term challenges, the anxieties about the vision underlying the
economic policy and about forgoing of opportunities created
by the sweet spot especially need to be decisively dispelled.
Given the above issues, the government has chosen to adopt
a balanced approach with focus on both quality spending
T
he
U
nion
B
udget
2017-18
*BE: Budget Estimate; RE: Revised Estimate
