The many challenges Jaitley must tackle with Budget 2017

By IndiaSpend Team
Finance Minister Arun Jaitley is likely to offer additional tax breaks to the salaried class, increase government spending to boost flagging demand and prepare the ground for the launch of basic universal income for some proportion of Indians who live below the poverty line — 172 million at last count — while presenting his fourth budget on February 1.

Jaitley’s challenges centre on the agriculture sector, on which 58 per cent rural households depend, still recovering from a two-year drought — vast swathes of the south are now enduring the worst northeast monsoon in 140 years; a seven-year decline in sales of manufacturing companies; and a slowdown in, among others, the construction and textile sectors — the biggest employers after agriculture, 69 million combined — after the government scrapped 86 per cent of bank notes, by value, on November 8, 2016.

Put together, these economic indicators jeopardise attempts to provide employment to young Indians — the failure to meet aspirations has set in motion a series of protests and agitations by various caste groups nationwide.

The budget is also likely to set the stage to end a 150-year colonial-era tradition of following the April-March financial year and switch to January-December, in line with the country’s monsoons and harvest. Jaitley is also likely to break tradition and move away from plan and non-plan budget allocations — a method of accounting that considered five-year plans, which began in 1952 and ended in 2014 — to budgeting by annual capital and revenue expenditure.

The National Democratic Alliance (NDA) government, headed by Prime Minister Narendra Modi, has benefitted from declining global crude oil prices since 2013-14, saving the government over Rs 2.7 lakh crore ($39 billion) in 2015-16. The savings have not been passed on to consumers, who have paid greater taxes on petroleum products; excise duties on petrol and diesel now account for over 50 per cent of excise revenue.

While the Modi government has accepted the recommendations of the 14th Finance Commission to increase the share of states in central taxes to 42 per cent from 32 per cent, money given to states could actually be between 26 per cent and 39 per cent lower.

Jaitley increased allocations to agriculture by 84 per cent in 2016, but after adjusting for costs, a farmer’s income effectively rose five per cent per year over a decade (2003-2013), calling into question Jaitley’s declaration of doubling farmers’ income over the next five years.

Rabi crops have been sown on nearly 63 million hectares, six per cent more than last year (2014 and 2015 were drought years) and around 34 per cent more than the average of the last five years.

The worry, however, is that the retreating northeast monsoon — usually unnoticed owing to the singular importance of the larger southwest monsoon — in 2016 was the worst ever over the last 140 years, according to Indian Meteorological Department records.

While the Tamil Nadu government has already drought in the state, south India’s combined reservoir levels are now at 30 per cent of capacity, according to data from the Ministry of Water Resources.

The industry scene is also worrying for the government. While the index of industrial production increased 5.7 per cent in November 2016 compared to the previous year, rising non-performing assets and sluggish economic growth caused a 60 per cent decline in corporate borrowing over the last six years.

Some industrial recovery was apparent over the last two years, but the demonetisation exercise set that back.

The Rs 17-lakh crore demonetisation of the economy slowed the growth rate to 7.1 per cent from the earlier estimate of 7.6 per cent, according to the December 2016 monetary policy statement by the Reserve Bank of India.

Growth for the second quarter (July-September) of the current financial year (2016-17) was down to 7.1 per cent from 7.3 per cent in the first quarter (April-June), according to November 2016 data from the Ministry of Statistics.

Direct-tax collections (income tax, corporate tax) increased over 12 per cent to Rs 5.5 lakh crore for the nine-month period April-December, 2016, over the previous year, while indirect-tax collections (excise, customs) increased 25 per cent to Rs 6.3 lakh crore, according to Finance Ministry data, belying some slowdown fears, although many sectors are now reporting slowdowns.

Jaitley had presented a budget of Rs 19.8 lakh crore for the year 2016-17, an increase of 11 per cent over the 2015-16 budget estimate of Rs 17.8 lakh crore — equivalent to the cash in circulation before the demonetisation of Rs 500 and Rs 1,000 notes in November.

With only two years to go for the general elections in 2019 and the mid-point of the Modi regime, the grand challenge will remain generating over a million jobs per month, amidst worrying education levels and health indicators, both important factors in preparing India to cater to a working-age population of about a billion people in 2020.