Abheek Barua: Budget 2017 the hardest one to crack

The Budget could well make or break India's economic recovery

As a card-carrying Budget analyst who has been crunching fiscal numbers for more than two decades, I am a little apprehensive that the forthcoming Budget will turn out to be the hardest one to crack yet. This is essentially for three reasons. For one thing, it comes in the wake of an unprecedented macroeconomic shock — demonetisation.  That in itself might not send it to the top of the complexity list.  We had a Budget that responded to the great financial crisis of 2008. However, the impending introduction of the goods and services tax (GST) muddies the waters a little more. I would assume that the indirect tax projections would be underpinned by the new rates under the GST. But things still remain a little fuzzy on that front. Someone who tries a bottom-up analysis of the numbers will come up against somewhat obvious obstacles. Which goods, for instance, are to be taxed at what rate? How will the Budget accountants split the GST imposed into the Centre’s take and that of the states when it comes to arriving at the headline figures? The third problem that makes life even more difficult arises from the change in fiscal accounting norms. The spilt between “Plan and non-Plan” revenues on expenditures will disappear and the entire Railway Budget (that served as some kind of a warm-up for the main Budget) will now be part of the general Budget. 

The obvious problem with all this is that it would make comparisons with previous years difficult. While a diligent analyst is likely to be undeterred and do the necessary adjustments to arrive at a correct comparison, there are other problems as well. The Plan versus non-Plan split might be defunct now but it did serve a purpose, helping to draw a quick distinction between the more “productive” revenue expenditures of the government and its humongous housekeeping spend of the government on things such as wages and interest payments (I would include subsidies as well). 

Let me explain. Contrary to the common but flawed belief that all Plan spending was “good” asset-creating capital expenditure, it had a significant revenue component. This was what could loosely call “good” revenue spending — stuff such as expenditures on programme like the MGNREGA (whoops!). This split in the headline revenue number was useful in making a quick assessment of the quality of Budget spending. I hope the new format enables us to make these distinctions easily.

The integration of the Railway Budget into the main raises the risk that the specifics of its spending and earnings plans and projections will get buried in the barrage of information on different sectors that the general Budget contains. This is important since the railways are yet to do their share of heavy lifting in infrastructure investment. (Going by recent news reports, capex this year has fallen considerably short of target). Given the risk that the other key sector — roads (which seems to have picked up sharply over the last couple of years) — could hit a peak soon, the railway engines have to chug now if the government wants to sustain a government-spending driven economic recovery. I sincerely hope that the concrete plans for the railways find their way into the Budget.

Most critically perhaps, the February 1 Budget will be a “post-demonetisation and part-remonetisation” one. The way in which the finance minister (FM) chooses to reflect this in both his Budget speech and the Budget numbers will be critical to the credibility of the Budget and offer a glimpse into the strategy going forward. The first question that one needs to ask here is what kind of growth should the FM factor in?

 

There seems to be some anecdotal evidence (and some hard numbers) that the impact of demonetisation has been somewhat transient for some sectors at least. However, the fact is that the evidence is both sparse (given the size of our economy) and perhaps not entirely representative of broader trends. Besides, as a member of our much maligned tribe, I tend to be sceptical of the very idea that the economy can “switch of” and “switch on” so quickly. However, I am open to counter-arguments.

If the Budget’s underlying growth assumptions turn out to be too aggressive, it will end up raising eyebrows and hinder the Budget’s credibility. However, if the government wishes to premise its fiscal calculations on robust growth, it either has to produce concrete plans that spur this growth or make a clear case as to why it expects the economy to get back on its feet without much mollycoddling. Thus, as far as macroeconomic assumptions go, this cannot be “business as usual”. We need clarity on how the government has thought through this entire episode.

Then there is the business of how the government deals with the somewhat unexpected “upside” of “notebandi”—the rapid migration to cashless payment systems ranging from credit and debit cards to mobile wallets. My colleagues and I have argued (Could less cash raise the tax-GDP ratio?, Business Standard, January 16, 2017 ) that this could potentially raise the tax-GDP ratio substantially for both the Centre and states. 

That said, this will not happen instantly and if the tax projections are terribly grandiose, it will raise fears of heavy-handedness by the tax authorities. That’s unlikely to help business or consumer sentiment in these uncertain times. Besides, the experience of the CENVAT (central value added tax) and state VAT shows that a change in the tax regime leads to a short-term decline in tax collections while medium-term gains can be solid. To be credible, the Budget will have to take this into account as well. 

The phrase “make or break” is used all too liberally by our print and electronic press to describe Budgets. I have, in the past, scoffed at this unnecessary hype. However, this Budget could well turn out to be genuine article both in either making or breaking the economic recovery and, by the analytical challenges it presents in its new avatar, make or break an analyst’s reputation.

The writer is chief economist, HDFC Bank. 

Views are his own