Modi’s war on inflation may hurt his own ability to fulfil budget promises

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Published: February 8, 2019 11:20:06 AM

However, the promises and grand announcements beg an answer to the obvious question: where would the money come from?

With an eye on elections, the Modi government in budget 2019 — its last for this term — announced several fiscal sops such as income support scheme for farmers, raised income tax ceiling, exemptions for real estate sector and others.

However, the promises and grand announcements beg an answer to the obvious question: where would the money come from? Amartya Lahiri, Professor of Economics, Royal Bank research professor and Johal Chair, University of British Columbia, Canada, in his article published in The Indian Express, pointed out towards the ambitious revenue targets of the government in the budget 2019.

The budget expects the total tax revenues to grow by 13.5 per cent in FY19, on the back of 15 per cent growth in both GST and corporate tax. This is on the back of an assumption of 11.5 per cent growth in nominal GDP in 2019-20, taking it to Rs 210 lakh crore, wrote Lahiri.

However, according to the CSO data released earlier in January this year, the projected nominal GDP for 2018-19 is Rs 188.4 lakh crore, assuming a nominal growth of 12.3 per cent. With CSO forecasting a 7.2 per cent growth in real GDP for 2018-19, this implies a GDP deflator inflation of 5.1 per cent for the same year.

This is in contradiction with all the CPI inflation numbers predicted for 2018-19 which are around 3 per cent. Since, the CPI and GDP deflator always move together, this seems strange.

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A lower inflation rate may reduce nominal GDP in 2018-19 which would have fiscal implications, Lahiri wrote in his article. Therefore, there are concerns if nominal GDP numbers are going to hold up with subsequent releases. The prediction becomes difficult as there was an upward revision of both real and nominal GDP growth for 2016-17, while a downward revisions in others. With the downside risk to the deficit being huge, it is a risky budgeting, said Lahiri.

There has likely been a large fiscal slippage this year that has been camouflaged and the combined public sector deficit including central, states and PSUs is above 8 per cent, said Lahiri.

Moreover, the income support scheme which amounts to Rs 500 per month for those having landholdings below two hectares seems rather low to have any tangible electoral payoff, Lahiri wrote. He further pointed out towards the silence of budget on the subject of jobs, adding that the budget may not satisfy either the middle-class urban voters or the distressed agrarian sector.

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