Union Budget was presented against the backdrop of rural distress, declining investment and stress on banking sector. The jury was divided, whether the finance minister should allow the fiscal deficit to expand or stick to the fiscal consolidation road map laid out in the previous Budget. While a group of analysts was in favour of expansion to kick-start investments, the other group was putting more importance on fiscal consolidation. The finance minister has stuck to the fiscal consolidation path.
The Budget has tried to address all three major issues. The dependence of Indian agriculture on the monsoon is a major reason for rural distress in the last two years. The government laid down a road map for reducing this stress, but the impact of the irrigation fund (to be created in Nabard) with an initial corpus of Rs 20,000 crore and sustainable management of ground water resources (Rs 6,000 crore and proposed for multilateral funding) will be felt in the long term. More allocation for rural roads and MGNREGA will increase employment in rural areas.
GFCF rate has declined to 29.4% in 2015-16 (advance estimates) from 34.3% in 2011-12. The government has limited fiscal space to increase capital formation. A large part of capital expenditure is done by state governments (their share in general government capital formation in 2013-14 was 55%) and proportion of general government in total GFCF in 2013-14 was a paltry 13.7%. But investment in roads and railways — outlay in 2016-17 proposed to increase to Rs 2,18,000 crore — will catalyse demand of bitumen, steel and cement.
The government allocated Rs 25,000 crore for bank capitalisation. In light of new RBI guidelines to banks, and the extent of stress on the banking sector, this amount appears insufficient.
Both bond and currency markets have given a big thumps up to the Budget. Bond prices increased and bond yields corrected. The 11% nominal GDP growth in 2016-17 looks a plausible assumption (7.5% real GDP growth and 3.26% growth in GDP deflator). The performance of the monsoon is crucial to achieve this. One percentage point increase in agricultural GVA will translate to 11 bps increase in GDP growth. In case of normal rainfall, agricultural GVA may grow at least 3% and thus 7.5% real GDP growth will be achievable. GDP deflator in the second quarter of 2015-16 declined 1.3%, but grew 1.9% in the third. Inflation is likely to remain benign in 2016-17, so 3.26% growth in GDP deflator can’t be ruled out.
To adhere to the 3.5% fiscal deficit to GDP target, the finance minister may follow the old route of cutting down capital expenditure. Both capital expenditure and capital expenditure including grants for capital creation has declined as a proportion of GDP in 2015-16 (RE) from 2015-16 (BE).
By Devendra Kumar Pant, Chief Economist, India Ratings & Research