JANUARY 27, 2017

By TIOL Edit Team

THE Union Budget for 2017-18 might well go down in the history as one prepared amidst unprecedented uncertainty. And uncertainty can alter or even mar the planned outcome of the Budget, which is expected to be presented on 1st February. This situation would make Finance Minister Arun Jaitley's task far more challenging than one faced in the normal years.

The six major factors driving uncertainty are: 1) multifarious effects of demonetisation on economy; 2) impact of unfolding Trump Economics including prospects of further hike in interest rates by US Federal Reserve on India and global economy; 3) further postponement of GST roll-out from 1 April to likely 1 July 2017; 4) merger of Railways Budget into Union budget; 5) projected rise in global prices of industrial commodities in 2017 and 6) advancement of budget presentation by a month.

All economists except the ones in the Government agree on one conclusion-demonetization has created uncertainty, whose impact over the medium and long-term is difficult to determine. Many including international entities have scaled down growth projections for India for current fiscal and the coming one 2017-18.

The latest to do so is International Monetary Fund (IMF).

In its Update of the World Economic Outlook (WEO) released on 16th January 2017, IMF says: "In India, the growth forecast for the current (2016–17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative."

Mr. Jaitley is thus expected to unveil a slew of initiatives to offset the adverse impact of demonetization on the economic growth, investment climate for both domestic and foreign investors, enhanced risks of loan defaults, dented state revenue collections and central revenue receipts that are partly shared with States, battered cash-intensive small and tiny enterprises including street vendors and daily labourers.

FM has to thus plan an optimal blend enhanced public sector investments that help attract private investments and create jobs with diverse tax & non-tax sops to perk up economic activities across the value chains. Reversing the trend of slow-down in export growth is yet another objective that FM has to fit in his scheme of ideas.

He also has mull over innovative ways to ease the hardship of daily wage earners, fledging micro-enterprises, farmers and other sections of the society that bore the maximum brunt of cash crisis caused by demonetisation.

And while pitching for inclusive growth-promoting budget, Mr. Jaitley has to keep an eye on fiscal and revenue deficits, both of which have to be kept within the targets mentioned in medium-term flexibility. He might like to be flexible on these numbers, assuming N.K. Singh Committee on review of Fiscal Responsibility and Budget Management (FRBM) Act & FRBM road-map has recommended fixing deficits as a range instead of rigid fixed numbers.

He would also have to factor in lurking fear of return of global inflation and its spillover effect on Indian economy, which is heavily dependent on imported crude oil, liquefied natural gas and coal.

In its latest quarterly Commodity Markets Outlook (CMO) report released on 24th January 2017, The World Bank foresees crude oil prices rising to USD 55 per barrel in 2017 from USD 43/bbl in 2016 following agreements among some Organization of the Petroleum Exporting Countries (OPEC) producers and non-OPEC producers to limit output in the first half of 2017.

Energy prices rose 11 percent in the fourth quarter of 2016 from the previous quarter with strong gains in all fuels. Coal prices soared 38 percent on strong demand and continued supply tightness in China resulting from government efforts to reduce coal capacity. Natural gas prices rose 8 percent, says the report.

Such trends, if they gain momentum, can not only stoke price spiral in economy but also force FM to revisit the taxes especially the periodic hikes in excise duty on petroleum products made in 2014-15 & 2015-16.

The prospects for mid-course interventions by Finance Ministry due to global factors would also be determined by spillover impact of economic changes in the US under Presidentship of Donald Trump.

If the forthcoming budget translates into economic growth of 7.5-8.0% with inflation of 3-4% in 2017-18, then Mr. Jaitley would be credited with achieving a herculean task.