The good, bad and ugly of Arun Jaitley's Union Budget 2018-19

Even before Finance Minister Arun Jaitley would have sat down to work on the annual financial statement of the government of India, he would have been staring at a nearly Rs 1-lakh-crore hole in the accounts. GST tax cuts on over 200 items and anaemic collections in the past two months had resulted in a Rs 40,000-crore shortfall; RBI had delivered Rs 27,500 crore less in dividend than the government had projected; telecom spectrum revenue had fallen by Rs 14,500 crore and thanks to political brouhaha over rising fuel prices, cuts in excise on petrol and diesel had delivered a Rs 13,000-crore blow to the accounts.

The Budget exercise would have started in the context of this huge setback of Rs 94,800 crore to the fiscal. Also, each time the economy has delivered 7, 8 or 9 per cent growth in any quarters barely three years earlier, at least two engines of the economy - exports and private sector investment - were firing on all cylinders. That was not the case this time round. Exports are barely growing at 12-odd per cent monthly year-on-year basic and private investment announcements have halved since 2014-15 to around Rs 8 lakh crore. The other engine of the economy, agriculture has also been sputtering under massive agri distress where farmers are unable to get remunerative prices for their produce.

Given that three of those engines of the economy were not firing, the FM's options were limited. He had to take it upon himself to keep the economic engine moving. He had to ensure that the limited resources at his disposal were channeled in a focused manner to create every possible economic activity that would lead to some job growth while he waits for other engines to revive. That he managed to do that in focusing all his resources toward infrastructure development, rural, agriculture, social and healthcare sectors was a very judicious use of the resources. That makes it a good move. Never mind that it reflected the government's nervousness after the less than stellar results in the Gujarat elections. Never mind that these were done with one eye on the next general elections.

In its singular focus on the vote bank, has the government taken its eyes off the other pressing needs - exports growth, job creation and reviving private sector investments. Of these, kick-starting private sector investments was way beyond its control. Capacity utilisation in most industries, barring a handful, is still in the 70-75 per cent range. Even at an ambitious 15 per cent growth, the private sector would only start thinking of reinvesting in no less than 16-18 months. So, it had a great opportunity to create avenues of export growth, push services sector growth since job creation there is rapid and in large numbers and most importantly creating a roadmap for job creation. The government expects that its investment of nearly 6 lakh crore in infrastructure and over 14 lakh crore in rural areas will be able to substantially increase job growth. But even if this investment happens, the job growth may play out far slower than expected.

What makes this Budget ugly is the fact that the government breached the fiscal deficit target of 3.2 per cent and will close the fiscal at 3.5 per cent. Sure, the FRBM allows such latitude up to 0.5 per cent. But this balance sheet will also fail to deliver the 3.2 per cent target next year as well (deficit projected at 3.3 per cent). Not sticking to the fiscal roadmap has consequences. For one, global credit ratings agencies will look at it unfavourably and a lower rating has a bearing on foreign investments. Higher fiscal deficit also raises government borrowings, which in turn crowds borrowings the private sector can take. Besides, it causes inflation and generally leads to the government raising taxes to make up for the shortfall. That's the last thing the government can afford now.