Growth, sentiment, relief and the underlying interactions between the three – at a very macro level, these were the issues finance minister Arun Jaitley and his government needed to address in the Union Budget.
With the latest GDP numbers indicating a slowing of growth and, more worryingly, a contraction in gross fixed capital formation, the budget needed to do something to revive investment, especially with private investment showing no signs of recovering soon.
The short-term pain associated with demonetisation had turned sentiment, both consumer and business, negative, and the budget had to have something in it to make everyone feel better.
As a corollary to the above, and also to address pain in some sections of the informal and rural economy not related to demonetisation – in parts of Tamil Nadu, for instance, the crisis is agrarian and on account of poor rains in the North East monsoon – the budget had to find a way to provide relief to the affected.
Never mind the big ideas (of which there were several) or the fiscal deficit, these were the things Jaitley’s fourth budget had to address.
On paper – as always, much will depend on implementation going forward, and navigating global shocks that are surely in store – it did all that.
On the growth front, by promising almost Rs 4 lakh crore of investment in creating infrastructure, the budget may have done enough to ensure public investment keeps the wheels of the economy turning till such time private investment is ready to take over. There was enough in it for housing and banks (expectedly, stocks of companies in the two businesses did very well, and drove growth in stock market indices), two sectors that have the ability to amplify, or at the least, transmit growth. And it mentioned enough initiatives and reforms in the works, including a new labour code and the scrapping of the Foreign Investment Promotion Board, that will make it easier to do business in India.
Relief for the farm and the rural sector came from an increase in spending, including in farm credit and the populist rural job guarantee scheme MGNREGA introduced by the previous government. The government spent more on the job guarantee scheme, especially in the second half of 2016-17, taking total spend in the course of the year Rs 47,500 crore, much higher than the budgeted Rs 38,000 crore. The budget for 2017-18 allots Rs 48,000 crore for the scheme. For the salaried, the relief came in the form of a tax cut of 5 percentage points for those who earn between Rs 2.5 lakh and Rs 5 lakh; a little over half of the 37 million people who file tax returns in India are in this income group, so the government’s sop is well targeted. For businesses with a turnover of less than Rs 50 crore, there is a 5 percentage point cut in the applicable tax rate to 25%. This should provide some relief to medium and small enterprises, especially those that straddle the interstitial space between the formal and informal economy and which have been hit hard by demonetisation.
All of the above should, apart from providing relief, also boost sentiment. In addition, markets (stock, bond, and foreign exchange) are a good measure of investor- and business-sentiment and two of the three reacted positively to the Union Budget. The Indian currency gained the most in over eight months, largely because the finance minister said he would stick to his fiscal deficit target. Stocks rose on account of the focus on growth, but also because of tax reforms and clarifications, including one that exempts foreign portfolio investors from a tax on indirect transfers, a controversial tax that was announced earlier and deferred last week. The bond markets initially reacted positively to the budget because they thought the government’s borrowing would be lower than previously expected, but confusion over this number, caused bond yields to rise (which means bond markets fell) by close of trading.
By far the biggest boost in sentiment, though, came from the fact that Union Budget 2017-18 didn’t have any unpleasant surprises in store, at least none that had been noticed till late in the evening of February 1. The sudden spike in stock markets, a classic relief rally, soon after the finance minister’s speech ended, can be attributed to this, the absence of bad news. That may well be the greatest achievement of the budget: it had a little something for everybody; it didn’t bloat government finances; but perhaps most importantly, it didn’t shock a system that isn’t particularly well-equipped to deal with shocks right now.