A MACROECONOMIC PERSPECTIVE
The Union Budget framed by the current government for FY18 should be perceived in the backdrop of major headwinds that has and would have a profound impact on the growth prospects of the Indian economy. The uncertainty related to Brexit and Trump’s policy moves, elevated oil prices and geopolitical uncertainty has heightened downside risks to India’s growth prospects from the global standpoint, while on the domestic front, weak demand and the extent to which the effects of demonetisation would spill over to the next year, frail private investments, rising NPAs and downbeat corporate sentiment have emerged as major threats to derail the growth momentum.
The Union Budget was thus expected to give a fillip to consumption and investment while treading on the path of fiscal consolidation roadmap besides signaling stability, continuity and clarity. The Finance Minister has done just that by delivering a pragmatic, fiscally prudent and socially inclusive budget. The fiscal deficit target of 3.2% for FY18 would provide impetus to rating agencies worldwide to enhance India’s sovereign rating. While the target seems to be quite optimistic amidst the current slowdown and increasing downside risks to the economy, it might be achieved on the back of rationalization of taxes, additional measures to enhance the tax base and implementation of GST.
Based on the agenda of “Transform, Energise and Clean India”, the Union Budget focused largely on rural and underprivileged, infrastructure, transparency and accountability initiatives and prudent fiscal management to accelerate economic growth.
The four main takeaways from the Union Budget for FY18 would be focus on accountability and transparency in political funding, undertaking a major reform by abolishing FIPB which would further enhance the FDI inflows, plan to integrate PSU oil majors to compete with global and domestic players and giving infrastructure status to affordable housing which would incentivize private players to participate in this segment.
The budget has signaled continuity in economic policy priorities with a strong focus on rural India. The total allocation for the rural, agriculture and allied sectors in 2017-18 is ` 1.87 trillion, which is 24% higher than the previous year.
Higher allocation to MGNREGA (` 480 billion) and Pradhan Mantri Gram Sadak Yojana (` 190 billion) will help boost rural income and in turn will propel consumption in rural-linked sectors such as tractors, two-wheelers and fast moving consumer goods.
The targeted and time-bound approach of the government – to double the farmers income in 5 years, infra status to affordable housing, Mission Antyodaya to bring 10 million households out of poverty and to make 50,000 gram panchayats poverty free by 2019 and developing a composite index for poverty free gram panchayats to monitor the progress, achieving 100% village electrification by 1st May 2018 and connecting habitations with more than 100 persons in left wing extremism affected blocks by 2019 highlights the strong focus of the government to execute the schemes within a given time frame.
The much-needed emphasis on the languishing capital investment has received a boost through the more than 25% increase in government’s capital expenditure, including railways, which is expected to crowd-in private investment. The Trade and Infrastructure for Export Scheme (TIES) to be launched in 2017-18 is a dedicated approach to support the ailing trade sector which would get an additional infrastructure push besides the ‘Sagarmala’ project of the government. The government also committed to spend ` 2.4 trillion in FY18 for transportation sector, including rail, roads and shipping spanning multi-modal logistics parks together with multi modal transport facilities, development works in railways, the multiplier effect of which would benefit the economy provided the execution starts at the earliest. The total allocation for infrastructure development in FY18 stands at approximately ` 4 trillion. However, the amendment bill for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts should be fast tracked to clear up long pending projects for effective utilization of the funds allocated.
The push given to digital payments and the Union Budget proposals on cleaning-up political funding reinforces the Government’s resolve to bring transparency into the system. The other transparency and accountability measures such as computerisation and integration of all 63,000 functional Primary Agriculture Credit Societies (PACS) with the core banking system of District Central Cooperative Banks, using space technology to plan MGNREGA works and geo-tagging all MGNREGA assets will foster the public faith in the system and reinforce the trust towards transparent governance.
Although the Budget clearly refrained from any big bang announcements, the implications of two major announcements i.e. abolishing of FIPB and integration of public sector oil majors would be realized in the way the policy is framed and executed. While the Budget was overall positive, addressing the key focus areas which would provide traction to the growth momentum of the economy, implementing and effectively executing the various initiatives will hold the key for its successful accomplishment.
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