Budget 2016: India’s policy-makers deserve enormous credit. At a time when growth impulses remained patchy and uneven, a large pay panel award was looming, the stock market was clamouring for more bank recapitalisation funds, and back-to-back droughts had increased pressures to reflate the rural economy, it must have been enormously tempting to unleash an array of spending under the guise of a “growth budget”. Instead, they wisely eschewed playing to the galleries and presented a serious, sober budget that prioritises fiscal consolidation. Cricket aficionados will recognise that a batsman’s mettle is often judged more by the deliveries he chooses to let go outside the off-stump rather than the ones he is tempted to play. Well left, Mr. Finance Minister.
Policy credibility is a precious commodity in these turbulent global times. So, that would have been reason enough to stick to the fiscal path previously promised. But, that apart, state finances are likely to come under pressure next fiscal year as they implement their own pay commissions and are liable for interest on UDAY bonds. So, even as central deficit has been reduced from 3.9% to 3.5% of GDP, the consolidated deficit of the Centre and states is likely to be flat compared to last year. Slowing the pace of consolidation would have resulted in an expansionary consolidated fiscal stance. For bond markets that have seen an unrelenting sell-off over the last three months—with spreads of state bond yields more than doubled over the last three months symptomatic of the demand-supply mismatch—a greater-than-expected supply of central and state bonds may have been the straw that broke the camel’s back. Unsurprisingly, bond markets cheered lustily. rates rallied across the yield curve, reflecting fiscal prudence and the increased space that this may open up for monetary easing. All this should put downward pressure on borrowing costs for the private sector and help with stressed balance sheets.
So, how did the government achieve the consolidation given the aforementioned expenditure demands? Disinvestment proceeds, strategic sales and spectrum sales are budgeted to increase by 0.45% of GDP—which is almost identical to the needed 0.4% of GDP consolidation. What this reveals is that the underlying fiscal stance in FY16 and FY17 is identical at 4.4% of GDP.
It is important, however, that policy-makers double-down on execution. Markets will be sceptical given the regularity with which asset-sale targets have been missed in the past. By renaming the department of disinvestment more broadly, the government has revealed it is thinking about assets-sales more holistically. Interestingly, tax revenue targets were budgeted very realistically—almost too conservatively—so they may surprise to the upside to compensate for any asset sale targets that are not met.
Apart from fiscal prudence, there were other positives in the Budget. It pledged to amend the RBI Act to set up a monetary policy committee; will introduce a direct benefits transfer for fertiliser subsidies and increase automation at fair price shops—both of which should result in plugging leakages. Additionally, the dispute resolution scheme promises to free-up taxman resources, make tax-policy more transparent and less arduous for firms and households; and will likely result in more resources being garnered for the government.
Some may lament that the government did not do enough for growth. It prioritised stability over growth. This presumes there is a trade-off between the two. Instead, emerging markets are replete with examples that macro economic stability is the foundation on which growth prospers. Just think back to 2009-11. Successive fiscal deficits went broke for growth. But that simply sowed the seeds for the mini-crisis in 2013. As it turned out, the fiscal adventurism post Lehman got us neither lasting stability nor growth. They say, those who ignore the lessons of history are condemned to repeat them. Markets clamouring for a growth budget have clearly forgotten those lessons. Thankfully, our policymakers haven’t.