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Business News/ Opinion / A scorecard for the Union budget
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A scorecard for the Union budget

Rarely has a budget faced as many trade-offs as this one; here are six dimensions on which to evaluate it

A file photo of finance minister Arun Jaitley. Photo: Vipin Kumar/HTPremium
A file photo of finance minister Arun Jaitley. Photo: Vipin Kumar/HT

Policymakers are sitting on the horns of a dilemma. External growth concerns continue to weigh on the economy (with global growth dipping to a paltry 1.6% in 4Q2015) as China is beset with huge over-capacities, commodity exporters feel the heat, and ageing populations and weak productivity have combined to lower potential growth in many developed markets. Additionally, India’s terms of trade shock from oil is set to wane next year, and impaired balance sheets suggest any private investment cycle is some way away. A normal monsoon and higher public investment should provide some growth relief, but growth concerns are rising globally and India is no exception. Consequently, many have called to slow the pace of fiscal consolidation again, as a means of buying some growth insurance.

But deviating from the fiscal path is not without risks. The continued sell-off in bonds is symptomatic of the nervousness and growing demand-supply mismatch in the market. In particular, risks to state finances have increased materially as they are liable for the interest on UDAY (Ujwal Discom Assurance Yojana) bonds and must accommodate their own pay commissions. Unsurprisingly, state bond yield spreads have widened by over 50 basis points (bps) over the past four months. Against these fragile bond market dynamics, and amid concerns that some UDAY bonds may add to supply, any unpleasant fiscal surprise could further push up benchmark yields—and increase private sector borrowing costs—apart from adversely impacting debt dynamics and impinging on fiscal credibility.

So, while growth concerns would warrant some fiscal easing, the hard-nosed reality of bond markets and credibility would suggest otherwise. But the trade-offs don’t end here. Apart from desirability, there is the issue of feasibility. To the extent that some fiscal space is created, where should it go? Higher public investment? More spending on the rural economy given the agrarian distress? More bank recapitalization funds? And how does one do this in the wake of a 0.8% of GDP (gross domestic product) increase in the wage bill proposed by the Seventh Pay Commission? Is the budget faced with trying to fit a square peg in a round hole?

Is there a path to simultaneously fulfil most of these objectives? It’s a narrow one, and entails taking political risks (pushing out some part of the Pay Commission), being creative (rethinking asset sales) and holding on to incremental gains from oil (letting retail prices rise if oil gives back some of its gains).

That said, the government is undoubtedly faced with difficult trade-offs. Given this, how does one even evaluate next week’s budget to assess whether authorities made the best of what they had? Here are six dimensions on which the budget should be looked at:

1. A fiscal anchor: Markets are bracing for the government to relax the fiscal road map, and target a deficit closer to 3.7% of GDP. But after successive deviations from the road map, markets will be yearning for a fiscal anchor. Will the budget provide an anchor that markets deem credible? Will it account for the fact that state finances are expected to deteriorate in the next year, and so the onus falls more on the centre?

2. Structural reforms of direct taxes: Authorities have promised a simpler, fairer, non-discriminatory tax regime. This is the budget to leave that imprint. Markets cheered the move to reduce corporate tax rates while closing exemptions. What advances will the budget make on that front? Will that same philosophy (reducing loopholes and exemptions so rates can be rationalized later) be extended to personal income taxes as well? Will sector-specific tax initiatives—that distort allocative efficiencies—be minimized in favour of a more neutral tax regime?

3. Assessing the quality of expenditure: Last year’s budget was cheered for improving the quality of expenditure as revenue expenditure growth was tamed in favour of capex. Will that process be reversed in the light of the Pay Commission-induced increase in the wage bill? Or will that be partially financed by finding subsidy and other savings (for instance, introducing Aadhaar in PDS to reap de-duplication benefits) to preserve capex investments? Will the government boldly push out parts of the Pay Commission (fiscal smoothing) to accommodate higher public infrastructure allocations?

4. A budget for Bharat: There is mounting pressure to boost rural allocations on the back of successive droughts. But will any increase be mainly in the form of wider safety nets (crop insurance and higher Mahatma Gandhi National Rural Employment Guarantee Act allocations) and higher minimum support prices—that boost rural consumption—or will it be largely higher allocation for rural infrastructure that boosts productivity growth?

5. Rethinking asset sales: It has been long argued that a comprehensive and nimble asset sale strategy is the best way, in the near term, for the government to (i) finance higher public investments while maintaining its fiscal contract and (ii) consolidate without imparting a fiscal drag. Will authorities use this budget to make a fresh start on asset sales? Set up an ‘Asset Sale Commission’ to make a more holistic assessment? Contemplate selling SUUTI? Devise tactics to sell assets in very small doses—a systematic (dis)investment plan—to protect against price vagaries through the year?

6. Banking reforms: No pain, no gain. Perhaps the most fundamental reform that the government and Reserve Bank of India have jointly engaged in is trying to clean up public sector banks. As painful as it appears, forcing non-performing asset recognition creates the condition to facilitate mergers, acquisitions and change the landscape of the banking sector. But authorities will have to hold their nerve through the pain. Capital, by itself, may not solve the problem. The focus must be on governance and management reform. Will the budget emphasize these governance reforms? Will the National Investment and Infrastructure Fund be used creatively?

All told, can the budget strike the right balance between growth and macroeconomic stability? We will find out soon enough.

Sajjid Z. Chinoy is chief India economist at J.P. Morgan. Views are personal.

Comments are welcome at theirview@livemint.com

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Published: 25 Feb 2016, 10:54 PM IST
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