What will be the one takeaway from the Union Budget for 2017-18? It was a bit of a mixed bag, so different groups will probably focus on different things. But for global investors, there will no doubt be a focus on the finance minister’s decision to delay fiscal consolidation. The fiscal deficit for the coming year is pegged to be 3.2 per cent of gross domestic product (GDP) instead of three per cent. It is important to realise why this matters: Global investors will look at that number first, and perhaps look only at that number. It will be interpreted as a sign that the main economic “achievement” of the Narendra Modi government so far, its restoration of macro-economic stability, is being sacrificed at the altar of expediency. That this did not happen at a time of drought but following a year dominated by self-inflicted damage will be noted.
The Budget is also notable for its continued focus on a growth-promotion model that has so far failed. The infrastructure expenditure by the government has, according to Mr Jaitley, gone up by 25 per cent. However, there was little or no clarity provided on what institutional changes will be brought into the sector in order to incentivise Budget 2017 Results private sector investment to follow this government investor. Without that, growth will continue to slow.
Many sections hurt by demonetisation were given specific sops, including small and medium enterprises, real estate and so on. But the informal sector in general was left out. This is a reminder that the government cannot easily help India’s vast informal sector through fiscal measures, though it can easily harm it. Employment generation in India today, sadly, occurs through the informal sector. While one could hope that eventually the small informal sector becomes the formal, tax-paying MSME sector and can benefit from Jaitley’s various tax breaks, there’s no real sign of this happening fast enough.
Overall, in terms of actual economic policy, the Budget was typically competent – but few could claim it moved as far forward as the government needed to with this Budget. Time is running out. It would be a pity if the most radical and transformative reform that the Modi government can point to as its legacy is demonetisation.