Ten days from now, Union finance minister Arun Jaitley will unveil the budget for the next financial year, in what could be his most crucial test since assuming office two-and-a-half years ago. The upcoming budget is seen by many as the last opportunity for Prime Minister Narendra Modi to deliver on his promise of “achhe din.”
It comes at a time when the economy has slowed, and slipped, to a state that is beginning to undo the hope and aspirations underlying the popular mandate Modi won from the country’s electorate in May 2014. Making it worse, the domestic political climate has turned increasingly hostile for the ruling coalition, while the external economic environment remains somewhat uncertain, especially with a “protectionist” new president in the United States — the world’s largest economy.
The challenges before Jaitley are many, the solutions few.
The finance minister is expected to come with measures that will help revive investment, exports and consumption demand, especially after the hit these have taken in the aftermath of demonetisation. Accelerating investment has been a priority for Jaitley, who has kept increasing allocations for capital spending through the three budgets he has presented so far. But actual spending has consistently fallen short of allocations and the private sector continues to shy away from making new investments. As a result, gross fixed capital formation — the broadest indicator of investment spending — declined from 32.3% in 2014-15 to 31.2% in 2015-16.
Provisional data, which doesn’t factor in the impact of demonetisation, suggests it would decline further to 29.2% in the current fiscal. The actual figure could turn out to be lower. This is worse than the worst years of the previous UPA regime. Unless the private sector turns around, increasing budget allocations for capital spending — as is widely expected, especially in areas such as infrastructure and housing — may not go very far in reviving growth. The other source of help could have been states, but most of them are short of funds — especially those who have lost out on central transfers after the Centre decided to rejig allocations for projects covered under the Five Year Plan.
The reluctance on the part of the private sector to invest more is, in turn, tied to a gloomy outlook on consumer spending and business-friendly policy changes. Consumer spending had seen some upturn in 2016 until demonetisation put it on a reverse track. But more than consumer spending, business confidence has been hit by a growing sense of disillusionment over the pace of key policy reforms.
According to the Federation of Indian Chambers of Commerce and Industry (FICCI) , which conducts a survey of a large number of companies every quarter, business confidence had peaked to a five-year high when Modi came to power in May 2014, but the euphoria didn’t last more than three quarters. The data for the period after demonetisation is yet to come. Some analysts believe it could have slipped back to where it was during the so-called “policy paralysis” phase of the UPA government.
There isn’t much that Jaitley can do to boost consumer spending. Given that the government plans to roll out the Goods and Services Tax (GST) in July, it would not be prudent to make any cuts in indirect taxes now. The budget may offer some tax concessions to the middle class and smaller enterprises, as a balm for the pain they suffered due to demonetisation. Jaitley will also have to find enough money to spend for all the rural schemes that will help the ruling coalition win votes in the five states — Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur — that go to polls days after the budget.
It remains to be seen how the lawyer-turned-politician balances the competing demands on the money his government has. As some would say, the real verdict on Jaitley’s budget will come when the results for these elections are declared on March 11.
Rajesh Mahapatra is the chief content officer, Hindustan Times.
Follow the author @rajeshmahapatra