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Insight: Will He Walk The Talk?

FM may relax his fiscal deficit target to get some elbow room to spend on the rural economy, Says Mahua Venkatesh

Photo Credit : PTI

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All eyes are now on Finance Minister Arun Jaitley, who will present the last full Budget of the NDA government before the country goes to polls in 2019. It is also the first Budget since the rollout of the Goods and Services Tax (GST) on July 1 and comes on the back of the Central Statistics Office’s (CSO) advanced estimate of a 6.5 per cent growth in GDP in 2017-18 compared to 7.1 per cent the previous year.

Jaitley has a tough task on his hands, maintaining that precarious balance between fiscal prudence and populism. North Block officials have indicated that public expenditure will be increased to provide a fillip to the economy and to create new jobs. Sources say the Budget will have to be carefully drawn to ensure that economic growth is back on track in the next financial year even as the government stance comes across as “being serious” about fiscal consolidation.

The BJP-led NDA government that came to power in 2014 with a promise of ushering in “acche din” has managed to introduce several reform measures to boost overall sentiments and help in the ease of doing business. It will, however, also have to immediately address challenges like the slowing economic growth rate, sagging investments and rising unemployment.  

It had set a fiscal deficit target of 3.2 per cent of GDP for 2017-18 and three per cent for 2018-19.The Finance Minister though, is expected to relax the fiscal deficit target this year, to accommodate increased spends on infrastructure, rural and social sectors. “A slight relaxation in the fiscal deficit target will provide a lot of  elbow room to the government in terms of additional resources and this must then be appropriately utilised to push growth and spends must be increased in sectors that have a multiplier effect,” says Crisil’s Chief Economist D.K. Joshi.

Some policymakers feel that the government should not get so focused on the fiscal consolidation agenda that it hinders development goals. The Fiscal Responsibility and Budget Management Committee, under the aegis of former Revenue Secretary N. K. Singh, submitted a four-volume report on the road ahead on fiscal consolidation and debt management to Jaitley in January last year. So, what could we expect from this year’s Budget? Insiders say, it will appeal to the “common man” and those at the bottom of the pyramid. While some tweaking of the personal income tax is likely, there is little chance of big tax breaks.

Rural Economy and Infrastructure
The focus, insiders say, will be on the rural and agriculture sectors. Agriculture provides employment to over 45 per cent of the country’s workforce. What will worry policymakers is the fact that the CSO data suggests that the agriculture sector is expected to grow at 2.1 per cent in the current financial year against 4.9 per cent in the last fiscal. Sources say there could be some scheme for income security of farmers by way of a price compensation mechanism for unforeseen events. The Finance Minister may also announce measures to upgrade agriculture and the irrigation infrastructure in the country.

“The agriculture sector growth is expected to be lower at 2.1 per cent ... this has to be improved ... agriculture will get a huge push in this year’s Budget ... there could be price support schemes for farmers which will have some fiscal implication, but will be good for growth,” says Soumya Kanti Ghosh, Chief Economic Adviser of the State Bank of India Group. Others predict sops for  micro, small and medium enterprises, which have been hit hard in the wake of the implementation of the GST and the demonetisaton exercise announced on November 8, 2016. This informal sector is the country’s largest employment provider.

Jaitley has indicated that spends on infrastructure — critical for generating jobs and reviving investments — will be increased. The government could announce new projects for building new roads, highways, ports and airports. Insiders say that the allocation for infrastructure may be double the Rs 3.96 lakh crore earmarked for it last year. The Pradhan Mantri Gram Sadak Yojana is also expected to get a push and see an increase in spends.

In India just over one per cent of the 1.25 billion people pay taxes. The Finance Minister is expected to announce a minor relief in Personal Income Tax for lower income slabs, but no major tax reliefs, because of the tight fiscal situation. The surcharge on the super-rich is also likely to continue. Last year, Jaitley had offered some relief to tax payers but had disappointed the multitude hoping for big tax breaks to cushion the blow of demonetisation.

An Ernst and Young report says India’s growth numbers are set to “climb up from now on with the effects of demonetisation and the transition hiccups of the Goods and Services Tax (GST)” settling down. But the Opposition has attacked the government for another spell of  “jobless growth.”

In the run-up to the Budget, Prime Minister Narendra Modi scheduled a meeting with the country’s top economiststo discuss the state of the economy. Sources say the Prime Minister has decided to personally monitor the job scenario in the country and his office has reached out to think tanks to assess the situation.