Will The Date Of This Year’s Budget Determine Its Contents?
Will an early Budget 2017 fall victim to both inadequate economic data and election populism?
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The Union Budget, to be presented on February 1 this year, will be tabled against the backdrop of a significant number of uncertainties.
The impact of the government’s decision to withdraw currency notes of Rs 500 and Rs 1,000 is still playing through the system. Early indications suggest that economic activity, in both the services and manufacturing sector, has been impacted. Unless countered quickly, the slowdown could further push back any revival in private investment in the economy.
On Wednesday, another uncertainty was added to the list. State elections. The Election Commission said that polls across five states would be held between February 4 and March 8, right after the budget presentation. Among these states are politically key states like Uttar Pradesh and Punjab.
This, together, with the need to placate any unrest caused by demonetisation among rural voters has raised fears that the upcoming budget will have populist undertones.
While the union budget will not be prepared keeping in mind just one state, it is possible that there could be some measures in the budget targeted at voters, said a senior economist requesting anonymity. There is not that much fiscal leeway, though for the government to be populist, the economist added.
Fiscal Space For Sops?
According to Radhika Pandey of the National Institute of Public Finance and Policy (NIPFP), there could be a tendency to extend sops for rural areas and farmers keeping in mind the negative impact of demonetisation and the upcoming state elections.
There are two aspects to it. Post demonetisation, the government is already in a mode of giving away sops. Some of those sops could come through the budget with a view to target rural areas. However, following the 14th Finance Commission, the flexibility of the central government has been curtailed. But still they could use schemes like MGNREGA and increase allocations there.Radhika Pandey, Consultant, National Institute of Public Finance and Policy
The 14th Finance Commission asked the government to devolve 42 percent of the share of central taxes to the states during the 2015-16 to 2019-20 period. This, in turn, required states to take on a higher share of the expenditure incurred on certain centrally sponsored schemes. This effectively means that the central government’s ability to pump prime the economy using these schemes stands relatively reduced.
In addition to the restrictions imposed by the 14th Finance Commission, the government will also need to keep the headline fiscal deficit number in mind while deciding to spend more on any social sector schemes.
Under the existing framework, the government is committed towards bringing down the central fiscal deficit to 3 percent by fiscal 2018. This commitment, however, could be relaxed by a committee set up to review the fiscal roadmap. The committee, headed by N.K. Singh, is widely expected to recommend a band for the fiscal deficit rather than a hard number.
This, according to some in the markets, may allow the government to work with a fiscal deficit target of 3-3.5 percent for the coming fiscal, leaving some room for stimulus. Small gains emerging from the extinguishing of demonetised currency notes could also give the government some wiggle room, wrote Indranil Sen Gupta, Chief India Economist at Bank of America Merrill Lynch wrote in a note on Wednesday.
We see little headroom for a major fiscal stimulus if Finance Minister Jaitley sticks to FY17’s 3.5 percent of GDP fiscal deficit target. This assumes that the NK Singh Committee raises the fiscal deficit target range to 3-3.5 percent of GDP from 3 percent earlier. We have raised (our estimate of) planned revenue expenditure by 10 percent to accommodate a step up in social schemes. This follows the recent ordinance that allows the RBI to cancel the liability in respect of demonetized Rs 500/1,000s not returned to banks. It presumably paves the way for a ‘special dividend’ to the fisc.Indranil Sen Gupta, Chief India Economist, Bank of America Merrill Lynch
Working With Inaccurate Estimates?
Another complicating factor, one being highlighted by opposition parties, is the fact that advance GDP estimates that will be used to plan the budget for FY18 will be unreliable.
The advance estimates, typically released in February, will be released on Friday and will capture data for only the first two quarters of the current financial year. Given that demonetisation will have a significant impact on growth in the third and fourth quarters, the Central Statistical Organisation’s full year estimates, that rely on just the first two quarters, may not be reliable, argues Yechury.
Economists agree with this view and say that budget estimates may undergo significant changes once the actual data for full year GDP growth is made available.
“The projections and numbers used in the budget will have to be taken with a pinch of salt. All fiscal projections may undergo a significant change once we know the real picture for the third and fourth quarters,” said Pandey.
Madan Sabnavis, chief economist at CARE Ratings, said that while there is some justification in attempting to advance the budget date so that there is more time to implement budget schemes, working with just six months of data for some indicators, can be a major handicap.
There are too many assumptions. Too many extrapolations. Particularly this year with demonetisation, you don’t know how the economy will respond.Madan Sabnavis, Chief Economist, CARE Ratings
That suggests a February 1st budget may end up pushing the political agenda more than the economic one.