How new Budget will take economy to the shore
Breaking from the tradition, the Union Finance Minister will be presenting Union Budget for the fiscal year 2017-18 a month ahead of scheduled date. This is also a year when a new tax regime namely the Goods and Services Tax (GST) will be introduced. The GST money is to be distributed by a pre-determined formula and the Union Budget will have to make assumptions about it depending upon rollout date.
The demonetization currency swap has created a cash shortage in the economy, which is not being replenished at the desired pace. Hence some of the consumption and investment expenditure is being postponed, held up, or worse, being cancelled. This is a temporary phenomenon and likely to see recovery in the following months.
Another reason for a cloudy outlook is global dollar strengthening. If the exchange rate drops by even one rupee, India's gross oil import bill goes up by more than Rs.15,000 crore. Many other imports also become expensive. Oil prices have also started inching up internationally. So inflationary forces are already at play. This means that interest rates do not have enough room to be cut down. As it is, the dollar interest rates have started moving up.
Private investment sentiment is still tepid. Gross fixed capital formation, that part of GDP that measures new capacity creation for future growth, has been stagnant or negative.
Further, the reason for concern is the continuing problem of non-performing assets i.e. bad loans in the banking sector. Much of this is a legacy problem, and is confined to projects in infrastructure, electricity and steel. The most recent bankruptcy and insolvency legislation will go a long way in providing a speedy resolution of the NPA problem, or at least bringing it within manageable limits.
Foreign investors' sentiment is low. Last fiscal year, India saw record dollar inflows in FDI, overtaking even China. But this fiscal there have been heavy outflows from the stock and bond markets, caused mainly by the strong dollar, and rising interest rates in the USA. It will be a challenge to attract foreign inflows at the same pace as in fiscal year 2015-16.
Lastly, and perhaps most importantly, the big looming challenge is that of job creation and livelihood support. The pace of job creation has distinctly slowed down, where recently even one of India's biggest engineering firms announced layoff of 14,000 personnel.
However, here are some steps that will go some way in clearing the dark clouds, and ushering some positive sentiment. First is a step towards a fiscal stimulus. Even though oil prices are inching up, they are still far below the days of 100 dollars a barrel. The direct benefit transfer has trimmed the subsidy leakage. Hence there is enough fiscal room for a tax cut. The FM had promised that corporate income tax rate would go down to 25 percent. So this is the year to start that downward trend. It may be a good idea to give some relief on personal income taxes as well, but in a way that does not significantly deplete the tax net.
