BackBudget 2017: Arun Jaitley settles for additional borrowing to boost investment
Finance minister sees need for more public expenditure amid sluggish private sector investment, makes higher outlays for railways, rural roads and housing
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Finance minister Arun Jaitley seems to have won over fiscal hawks within the government and decided to settle for additional borrowing to increase public investment in crucial infrastructure sectors to boost economic growth at a time of shrinking private investment.
Rejecting what the budget documents call “fiscal straitjacket", Jaitley increased his fiscal deficit target to 3.2% for 2017-18 from the 3% mandated by the fiscal discipline law and made higher outlays for railways, rural roads, highways, agriculture and housing.
“I have taken into consideration the need for higher public expenditure in the context of sluggish private sector investment and slow global growth. With this gradual approach, I have ensured adherence to fiscal consolidation, without compromising the requirements of public investment," Jaitley said in his budget speech.
Jaitley said the surplus liquidity in the banking system, created by demonetization, will lower borrowing costs and increase the access to credit. “This will boost economic activity, with multiplier effects," he added.
The capital expenditure has been raised by 10.7% to Rs3.1 trillion. The Pradhan Mantri Awas Yojana became the major beneficiary with a 39% increase in allocation to Rs29,000 crore, most of it focused on rural housing (up by 44%).
The budget documents further justified it by holding the short-term impact of demonetization and uncertainty on account of significant external political developments, global interest rate behaviour and capital flows pose potential downsides to economic growth.
However, the fiscal policy statement released along with the budget documents claims that the impact of demonetization will be limited to the last two quarters of 2016-17 and will not spill over to the next financial year.
It claimed that in the medium term, the benefits of demonetization would far outweigh the short-term impact on growth, through a more efficient payment system and greater formalization of business activities.
The finance ministry also expects the benefits of the implementation of the goods and service tax (GST) during the course of the next financial year to help improve the rate of GDP growth.
“The rate of growth in nominal terms is estimated at 11.75% in BE 2017-18, over the estimated nominal GDP assumed in the revised estimates of 2016-17. In the medium-term, GDP growth in nominal terms is assumed at 12% both in 2018-19 and 2019-20," it said.
Pranjul Bhandari, chief India economist at HSBC, wrote in a note that the budget will provide a small positive growth impulse to the economy.
“We expect GDP to grow at 7.1% in FY18, up from 6.3% in FY17, as the country gets sufficiently remonetized (by end April), and consumption moves back to pre-demonetization levels. However, we believe that investment, which tends to be sensitive to policy uncertainty, will continue to remain weak, keeping growth at an arm’s length from the cherished 7.5-8% levels," he added.
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