The Economic Survey 2016-17 tabled by the government in the Parliament today played by the book when it came to some of the pressing challenges that Finance Minister Arun Jaitley grapples with as he readies his third budget. Three points stand out. Firstly, the Survey clearly emphasised that fiscal consolidation is paramount. It said that ‘fundamental task of a budget is to preserve fiscal sustainability’. So does that mean FM will ignore the temptation to accelerate the economic growth through large scale public spending (in the absence of private sector investment) at the cost of delaying fiscal consolidation further? He did it last year and many economists and rating agencies are in a mood to forgive him if does it again this year. Reserve Bank of India (RBI) governor has warned the government against such a move. It is one of the toughest call the FM faces this year. He may still ignore the Survey and go for a larger public spending (the Survey calls for it) delaying fiscal consolidation further. With exports and private investments not giving the required thrust to economic growth, he can well argue that he had little choice. In 2016-17 the FM has to contend with 7th Pay Commission/OROP which the Survey acknowledges will be challenging from the fiscal point of view.
The second hint is on the inflation. While the Survey says that inflation in 2016-17 will remain benign between 4.5 percent to 5 percent and catch is in its view that there a risk of inflation rising if the wage hike in the government on account of the 7th Pay Commission spills into the private sector. It surely will, if not immediately, but after a while. So will this fear prompt the FM to stagger the 7th Pay Commission payment over two or more fiscals. That will keep inflationary pressures down but will impact his other objective of boosting consumption and thereby demand. This is critical for private sector to use up its surplus capacity and start investing. It looks like the FM has to do a tight rope walk on leaving more money in the hands of the people to boost consumption while at the same time keep inflation at bay.
The Survey also emphasises (in a way speaks for the government and industry) the need for relaxing the monetary policy stance adopted by the RBI. It is a acknowledged fact that the government and the RBI are not eye to eye when it comes to the pace of reduction in the interest rates. Government thinks that with inflation under control and it living within its means, time is ripe. But RBI begs to differ and prefers a wait and watch approach. Also, sharp increase in bad debts is forcing banks to hold back rate reduction as that would put enormous pressure on their bottom line and drive deposits to physical assets such as gold and land.
These apart, the Survey has pointed out that the accelerated rate of economic growth which the government is keen on is quite some time away. It has said that in 2016-17 the GDP will grow by 7 to 7.5 percent only. It has put medium term growth trajectory at anywhere between 7 to 7.75 per cent and has gone to the extent of saying that a 8 percent growth is possible only after two years. Tepid external environment (mainly fall in global demand and consequent lower exports) is the reason it gives for the slower economic growth.
If Jaitley wants to prove the Survey wrong when it comes to GDP growth, he will have to present a bold budget that deviates from the rule book and unleashes the animal spirit in the economy.
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