When Narendra Modi was swept into power in May 2014 with a majority mandate (which is somewhat rare in India), many expected India’s budget for the financial year 2015-2016, delivered in February 2015 to be a “big bang” budget. Investors were left disappointed in that, while it was a competent budget, it was not groundbreaking as the one delivered in 1991 which set India on the path to liberalisation. Needless to say, as Finance minister Arun Jaitley prepares to deliver his second budget expectations have been tempered and are modest. The reasons range from worries over the global weakness in emerging markets headlined by problems in China and Brazil to failure of the government to pass major structural reforms due to lack of numbers in the upper house and an unrelenting opposition.
While the hallmark of last year’s budget was efficiency and fiscal consolidation, this year’s budget is rumoured to boost the economy via increased government spending. Despite India being fastest growing major economy (projected by the World Bank to be so atleast till 2018) and an economic bright spot among emerging markets, the government recently downgraded its own forecast which highlighted they acknowledged a slowdown in growth, especially due to falling exports. A drought year has meant that food prices have rocketed which in turn has ticked the consumer price index upwards as the fall in oil prices are slowly negated due a base effect. This effectively means the prospects of India’s inflation conscious independent minded central banker Ragunathan Rajan cutting rates look slim. Sentiment and investor faith in India is also diminishing as major reforms such as the GST are stuck in parliamentary logjam. While the government sits on stakes in various public sector undertakings (some of them listed), selling them at this moment when the markets are spooked (as Indian Oil corporation shows) does not represent value for money and is short term thinking.
In such a scenario of global turmoil and an uncertain outlook, abandoning fiscal goals and pushing for increased government spending, especially on infrastructure (something India desperately needs) makes sense. While low oil prices may not Indian bring down inflation anymore, they do keep Indian macroeconomic indicators (such and current account deficit) well in check. India has also mustered enough forex reserves as a ratio of GDP to drown out global economic turbulence. Despite a much looser fiscal policy India’s budget deficit may not take such a beating as indirect tax collections are up some 36%. This jump is more than enough to make up for relatively lacklustre growth in direct tax collections as it keeps the government on track in raising its projected revenues (something which is rarely done in India). Therefore, several factors are aligning which make it practical for India to spend its way through globally tough patch.
Politically, extra government spending is also a winner. It generates jobs the government can directly take credit for, especially with infrastructural works. It is also something visible they can sell to the populace at the time to reelection. Ticking the economy along also buys the government time. While the government is expected to remain in minority in the upper house, the numbers of the main opposition party are expected to dip when ⅓ of the house is up for reelection during the budget session. This will make it easier for the government to pass its bills by working with regional parties not opposed to it or via a joint session. While major reform bills which need ⅔ majority in both houses will still be at the mercy of the main opposition party other bills such as those on real estate, the new bankruptcy code and new labour laws do not require such stringent requirements.
It is imperative that the government begins generating positive headlines about reforms in India as sentiment plays an increasing important role in shaping investment decisions. By all means push for the all important GST initially. But if passage is not likely due to a stubborn opposition, drop it and pass other bills which prevent the session from being washed out. Of 5 state legislative elections scheduled in April 2016 (the only major political event for the year) the government has a political stake in just 1 state (Assam) which is not that politically important. This implies the union government should (and most probably will) push aggressively for reform during the budget session while providing fiscal stimulus to prevent any drastic deterioration in the economy during the immediate future.
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