A Balancing Act

In my letter (A Lack of Data) in the Business Today pre-Budget special, I had pointed out: "Almost all economists agree what the finance minister ought to do. He should go in for hefty tax cuts to make firms and consumers start spending again, deepen the social security net so that the poor are benefitted, and boost government spending on infrastructure to get the economy going."

I had also pointed out that the lack of high quality data, post-demonetisation, would make working out the details of this Budget a bit difficult. "The problem is not with what he needs to do. The issue is how much he can do..."

The Budget documents show that Finance Minister Arun Jaitley has been cautious about calculating his revenue assumptions for next year. He has projected a 17 per cent growth in revenue for the current year. But tax revenue growth of only 12 per cent next year on a GDP growth projected at 11.75 per cent in nominal terms.

Despite the relatively modest revenue growth projections, the finance minister managed in large part to do what economists were hoping for. He plans to spend a fair amount on infrastructure (25 per cent above last year's budgeted levels or 11 per cent up if compared with revised estimates. He has allocated as much as he could for rural areas and farmers (roughly 24 per cent increase over the Budget estimates of last year, and 11.6 per cent over revised estimates).

And while he was constrained by the revenue projections and the fiscal deficit target he has chosen to follow (3.2 per cent), he managed some tax giveaways - by reducing personal income tax from 10 per cent to 5 per cent in the Rs 2.5 lakh-Rs 5 lakh bracket) and reducing corporate tax for MSMEs below Rs 50 crore revenues.

The tax giveaways, being relatively modest, are unlikely to boost consumption or investment big time. But the rural and agricultural allocations should increase rural incomes and kickstart rural consumption, especially of FMCG products, quite sharply. The rural and infrastructure proposals should also create enough jobs, though at relatively low levels of income, and mostly absorb the job losses in construction that we have seen in the first six months, and also post-demonetisation.

Will it boost the economy in a big way? In my opinion, the spending on infrastructure and rural areas is very likely to give the GDP growth a boost (unless we have some external shock) to a large extent, but it will not spur private investment in a big way, or for that matter, urban middle class consumption spends. Those, perhaps, will take a longer time to recover. Though, in our cover story, we explore five areas which could still see good opportunities for private investment and entrepreneurs. But given the constraints he had to deal with while making this Budget, it is a remarkable balancing act and a very prudent one.