Union Budget: FM has chosen stability over growth

In the face of a sluggish global economy and volatile global markets Finance Minister Arun Jaitley had to convey a message of continued macro stability while also striving to accelerate growth.

Budget 2016-17 is a complex and comprehensive document touching on many different areas which finance minister (FM) Arun Jaitley has categorised into nine distinct pillars. I will focus my attention on the overall macro scenario while also making some comments on the infrastructure sector.

The overall problem facing the country today is how to accelerate economic growth in the context of a difficult external environment. The International Monetary Fund has revised its expectations of global GDP and trade growth downwards on a continuous basis. The recent G20 meeting also focused on the difficulties being faced by the global economy and suggested that countries will need to utilise fiscal space wherever available in addition to the extended unconventional accommodative monetary policies being practised in the developed world. The slowdown in Chinese growth has only added to this problem.

As the FM rose to present his year’s Budget he acknowledged this global adversity in the first paragraph, while noting that India does stand out as a haven of stability and growth in the global context. The task before him was, therefore, difficult: In the face of a sluggish global economy and volatile global markets he had to convey a message of continued macro stability while also striving to accelerate growth.

My judgement is that he has clearly chosen the path of macro and fiscal prudence over that of growth promotion: This was already indicated by the Economic Survey, which refrained from projecting GDP growth in 2016-17 to be higher than that in 2015-16. Chief economic adviser Arvind Subramanian had earlier been on record favouring some fiscal risk-taking in the interests of growth. This view was clearly tempered in the Economic Survey.

As has been noted by almost all commentators, the FM has done well to stick to the declared path of fiscal consolidation despite the challenges posed by the 7th Pay Commission award and the One Rank-One Pension scheme for the armed forces. He has achieved the fiscal deficit target of 3.9% of GDP for 2015-16 and is sticking to the pre-committed target of 3.5% for 2016-17. For the future, he has however announced the constitution of a committee to review the implementation of the Fiscal Responsibility and Budget Management Act. The review could perhaps provide greater policy space to the government to be able to deal better with fiscal business cycles in future and not be as rigidly constrained by single numerical fiscal targets.

What is even more admirable in the fiscal arithmetic revealed in the Budget is the reduction in revenue deficit from the 2015-16 Budget estimate of 2.8% to 2.6% in the revised estimates and further to 2.3% for 2016-17. What is particularly welcome is the projected reduction in the primary deficit to 0.3% in 2016-17: We can, therefore, hope to achieve a primary surplus before too long, which would be a big positive for India’s debt dynamics in the future. As a consequence of this fiscal restraint, the projected borrowing for 2016-17 at Rs 533,000 crore will be marginally lower than that of the Rs 535,000 crore in 2015-16. This will no doubt bring cheer to the sovereign bond market, particularly if the Reserve Bank of India also manages liquidity better than it has in recent months. Overall, if these expectations are met we can look forward to somewhat lower interest rates in the Indian bond market, which could then extend to the broader economy thereby providing some stimulus to private investment over a period of time.

Given this robust fiscal scenario, and other favourable macro indicators, such as the current account deficit being lower than 1.5% of GDP, growth expectations being in the range of 7-7.5%, and muted inflation, India does stand out as a rose in the context of widespread global gloom. I would, therefore, expect both domestic and global markets to reflect this positive scenario in the coming months.

Has the finance minister, however, done enough to stimulate growth in the coming year and beyond? I’m afraid not: It does seem that he made a conscious decision in favour of prudence versus growth aspirations. Given the sluggish environment of private investment there was a need for both enhancing public investment in social and physical infrastructure, while also undertaking measures to stimulate private investment. There simply isn’t enough in the Budget on either count.

The NDA government had indeed provided a significant focus to public investment, in particular in railways and roads last year, and implementation has appeared to be robust. Although some degree of momentum has been maintained, there isn’t a comparable enhancement in allocations for such public investment this year.

In particular, I would have liked to see a greater allocation in gross budgetary support for investment in railways aimed at accelerating the implementation of the dedicated freight corridors. I am fearful that the plans the railways are making for greater borrowing and on wishful reliance on public-private partnerships will not fructify, and the overall economy will suffer as a consequence. Note that the gross budgetary support of Rs 45,000 crore for the railways is less than half of the total allocation for roads of Rs 97,000 crore, including Pradhan Mantri Gram Sadak Yojana. A significantly enhanced investment programme for the railways will energise the rest of the economy both directly and indirectly. This is an opportunity that is being missed on a sustained basis. This is an idea whose time has come.

There are two welcome announcements in the infrastructure area but we will have to wait to see how they will be implemented. First, as the National Transport Development Policy Committee had recommended, there is an announcement on the development of new greenfield ports on both the eastern and western coasts of the country. It should be ensured that these are developed as mega ports in conjunction with coordinated investments in railways and roads and other logistical arrangements for adequate connectivity with the rest of the country.

The other welcome announcement is the enactment of necessary amendments in the Motor Vehicle Act to open up the road transport sector in the passenger segment. Public transport is notable by its absence, as much in most cities in our country as in adjoining urban and rural areas. As proposed, new entrepreneurship in these areas can do much for the provision of frequent bus services through full size buses, mini buses, vans, mini vans, etc. My hope is that this system could evolve just as the new innovations ushered in by the availability of urban taxi services.

On the private investment front, the stressed balance sheets of both large Indian corporates and public sector banks are seen as the key constraint to a step-up in private investment. The resolution of these assets needs focused attention. The FM has announced a slew of measures to address this problem: The enactment of a bankruptcy law, various legislative and policy actions to promote the activities of asset resolution companies, recapitalisation of public sector banks, and the possible consolidation of these banks over time. What might have aided this process of taking off NPAs from the books of public sector banks could have been the announcement of a bad bank as a temporary warehouse for such assets before they are taken over by ARCs and worked towards financial health. A particularly interesting announcement is the intention to reduce government holding in IDBI Bank to less than 50%. If this is a precursor of similar moves to reduce government holdings in other public sector banks to less than 50%, this will amount to the initiation of the most important financial sector reform in India in decades.

Overall, this is a Budget designed to induce confidence and stability: As a cricket fan Jaitley has clearly emulated Rahul Dravid rather than Sachin Tendulkar or Virender Sehwag.

This article first appeared in  The Hindustan Times on March 1, 2016. Like other products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are those of the author.