India before the Budget
The year 2017 was a challenging year for the economy, having received a double whammy of demonetization and goods and services tax. Amidst persistent headwinds, projections on growth made at the beginning of the year were revised downwards even though green shoots across certain segments were visible – robust investment flows, increased government spending, buoyant capital markets and global upgrades. Despite a general sentiment that growth will hold in the coming quarters, the advanced estimates continue to depict some amount of disparity across segments. Further, with the successful passage of US tax reforms, bouts of volatility could be expected in the coming year.
This is the last full budget of the government, prior to general elections in 2019. Therefore, it can be expected that the upcoming budget announcements will be put under scanner. There is general consensus that focus needs to be on pushing growth in the rural sector, especially in tackling the root causes of agrarian distress. Here investments in rural infrastructure and agri-marketing are critical as a major factor behind falling farm incomes is in fact better production of perishable produce. Some of the issues that necessitates action include correction in barriers to entry in agricultural markets and minimizing supply side constraints. There is also a strong case to allow exports more freely and to create a more predictable and stable agri-trade policy.
Beyond this, execution of the bank re-cap plan and its impact on stressing government finances will be closely watched in the coming budget. The capital infusion - already approved for 6 public sector banks (PSBs) - will likely be front-loaded as per banks’ balance sheet performance[1]. The plan could increase the overall government debt, but its impact on the fiscal deficit is expected to be limited to interest payments, the severity of which may be lessened through dividend payments as PSBs recover. It is also important that efficient budgetary allocation be done through review of key sectors in order to minimize any fiscal slippage, given that there are significant headwinds to the fiscal consolidation policy like the rising crude prices.
In the coming year, an anticipated improvement in agriculture sector and infrastructure push will possibly aid the recovery process. Supported by an expected rise in government expenditure, private rural consumption will likely drive growth while private investment may build up through infrastructure push and global demand improvements. Overall, growth number are likely to build momentum over the coming year, however, much is riding on how quickly the economy adjusts to GST reform and how well the government manages fiscal deficit along with continuing the reforms and the necessary investment expenditure. As always timely and efficient implementation of policy is the key to stimulating economic growth and setting positive market expectations.
Information for the editor for reference purposes only
The author is Anis Chakravarty, Lead Economist and Partner, Deloitte India
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