Rupa Rege Nitsure
Against the backdrop of India achieving the lowest growth in the past five years in 2017-18 (FY18) and posting a sustained fall in the investment rate since 2011-12 (from 39% to 30.6% of GDP), the government’s decision to take a pause in fiscal consolidation is neither worrisome nor unexpected.
Signs of ‘fiscal slippage’ were pretty obvious, when the government had announced additional market borrowings in December, 2017. A countercyclical fiscal policy was actually recommended by several experts in their pre-consultative meetings with the Ministry of Finance.
However, what matters for sustainable growth is the quality of ‘fiscal push’ or public spending. It is discomforting to see that the ratio of revenue deficit for FY18 has sharply increased by 70 basis points (bps) from 1.9% (budgeted) to 2.6% (revised) and at the same time, capital spending has been revised downwards by Rs 36,356 crore reflecting a contraction of 4% over the actual capital spending in FY17. But this is the story for FY18. It needs to be seen as to how the government attains a better quality ‘fiscal push’ next year, as it proposes to reduce revenue deficit by 40 bps to 2.2% in FY19 and increase capital spending through the budgetary support by 9.9%.
From the revenue side, the centre is going to rely heavily on personal income tax proceeds, GST revenue and non-tax revenue (especially spectrum sales). One has to see how it achieves its revenue objectives, given a slower broadening of the tax base post demonetisation and GST implementation, continued weaknesses in industrial sector and jobs creation and severe financial stresses in the telecom sector with rapidly declining revenues of all major telecom service providers.
However, what is striking is the government exceeding its ‘disinvestment’ target in FY18, which marks a significant deviation from the past trends and this may emerge as the critical source of revenue for the government not just in FY19 but over the next several years. Higher disinvestment also has the potential to improve the efficiency of state-owned enterprises.
The real countercyclical and hence welcome measures are the ones for agricultural and rural belts plus the MSME sectors that were worst hit post the implementation of both demonetisation and the GST.
Assurance of fair price to farmers and rural infrastructure and the tax cut and extension of credit facilities to the MSME sector will certainly help in stabilising cash-flows in these segments and boost the overall demand. The initiative of “operation green” would even out frequent fluctuations and hence the volatility in the prices of perishable items.
A fear that proposed hikes in the minimum support prices of kharif and rabi crops (1.5 times the cost of production) would stoke inflation is not much justified in the present cycle, when agriculture is awash with over-production. Opening up of the farm markets to exports is another much needed measure, from the perspective of enhancing the income earning potential of farmers.
While bond markets have reacted negatively to the proposed fiscal deficit (3.3%) and gross market borrowings (Rs 6.06 lakh crore) targets for FY19, the reaction seems to be a bit excessive.
If growth in FY19 surprises positively as a result of the Budget’s fiscal push and on the back of two favourable crop cycles and a pick-up in exports, then ‘revenue generation’ in FY19 could be more than expected.
This may open up the possibility of lesser market borrowings than envisaged in the Budget. Moreover, a big push is given to deepen bond markets through RBI’s norms to nudge companies to access bond markets for fund raising, the Sebi advising large companies to meet 25% of debt from markets and permission to RRBs to raise money from markets.
This is particularly relevant when banks are still struggling with the stressed assets problem and likely to remain risk averse until the sector consolidates. Needless to say that all recent policy steps and budgetary measures are favourable for the development of bond market from a medium term perspective.
Increased agricultural production from the past two cash positive crop cycles combined with a favourable statistical base will give more benign CPI prints in the second half of calendar year 2018, which may perk up the bond market sentiment.
In our opinion, it is too early to expect a secularly hardening interest rate cycle. Rather, we expect RBI to keep policy rates stable and play a role that is complementary to a countercyclical fiscal policy. Luckily, the exchange rate has remained stable within a narrow corridor and with US shale producers pumping more barrels, crude price seems to have a limited upside.
Lastly, a tax on long term capital gains introduced in the Budget has eliminated un-evenness in debt and equity instruments and going forward, factors such as safety, risk appetite and diversification needs should influence the portfolio choice of investors rather than the tax component.
To conclude, by presenting an expansionary Budget, the government has signaled a countercyclical fiscal policy, which is the need of the hour. However, rigorous execution and follow up of various initiatives within the given time-frame remains critical for its success.
(The writer is Group Chief Economist, L&T Financial Services)
via A more taxing and less spending budget