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Would the Indian economy experience a true rebound post the populist euphoria of Budget 2018?

Wednesday, February 28, 2018

By Prof. Prasenjit K. Yesambare

“The budget is not just a collection of numbers, but an expression of our values and aspirations.” - Jacob Lew Well. That’s the single biggest question which would be deliberated,debated and discussed vehemently among Economists,policy makers and the Finance gurus - as to whether the Union Budget 2018 has the sufficient ammunition to fire the Indian economy in the zone of self sustained Economic growth in the coming days and months?? The budget has been lauded as "farmer friendly, common citizen friendly, business environment friendly" and is slated to add to 'ease of living' and 'ease of doing business', mulled by the Modi Government.But what amount of tangible impact it would have in boosting the prospects of the Indian economy needs to be seen in the coming days.

With an ambitious objective of pegging the Fiscal deficit at around 3.3 % of the GDP for FY19,thrust on creation of Socioeconomic Infrastructure, emphasis on increased planned allocation for Agriculture and the renewed emphasis of Pradhan Mantri Awas Yojana towards Rural India are indeed some positives which can be capitalized to propel the nation into the next big wave of Economic growth and development. These ultra zealous initiatives from the Finance minister in probably his last Union Budget presentation before elections in 2019 against the backdrop of big ticket reforms done by Modi Government like Demonetization, implementation of the Goods and Services Tax (GST),creation of the NITI Aayog,mega PSU Banks recapitalization,dynamic fuel pricing and the continued emphasis on the Digitization of the economy will all play a pivotal role in propelling the nation’s economic engine ahead (see Chart 1 for details on Trends in India’s Annual Real GDP growth). Source :,CIA World Factbook & ITM-SIA Research Cell Infact,India’s economic growth trajectory is slated to experience a steady revival with the Economic survey released a couple of days before the Union Budget of 2018 pegging 2 India’s GDP growth rate forecast at 7-7.5 per cent for FY18.The document also made a reference to the fact that from 2014-15 to 2017-18, the GDP growth rate averaged around 7.3 per cent when the Global economic growth just hovered in the range of 2 to 3 per cent in the same period.

For being the world's sixth-largest economy by nominal GDP and the third-largest in purchasing power parity (PPP) terms, it indeed is a remarkable feat considering the fact it has been in a position to clock a 6 -7 % average GDP growth annually since liberalisation in 1991. But before,we strike a meaningful correlation between the Union Budget 2018 and the course of India’s economic growth, let us understand in simple terms,the impact of the Budget on the Market and the Economy. Impact of the Budget on the Market and the economy Well for beginners of Economics and Finance,the Budget does have a significant impact on the economy, the interest rate and the stock markets. The way, the Finance Ministry spends and invests money affects the fiscal deficit.

The extent of Fiscal deficit,as a percentage of the Annual GDP and means adopted by the Finance Minister for financing the deficit certainly influences the money supply and the interest rate in the economy.A bout of High interest rates spells higher cost of capital for the industry,leading to lower profits and hence culmination in lower stock prices. In addition,the fiscal measures adopted by the Finance Minister (in his budget document) strongly influences public expenditure.An increase in direct taxes decreases disposable income thereby reducing the demand for goods.This translates into a decrease in production; a strong demotivating factor for the Industry thereby affecting economic growth. Similarly, a spurt in indirect taxes would also significantly impact the aggregate demand in the economy,as any escalation in indirect taxes gets partially or completely passed on to the consumers in the form of higher prices.

This further dampens the consumption demand thereby eroding the profit margins of companies and considerably slowing down production and growth. An increase in Non-planned Outlay (expenditure) on subsidies and defence also dampens the economic prospects as resources and funds utilized for non-productive purposes lead to Fiscal Profligacy. Thus,the Union Budget 2018 presented by Modi Government by pegging the Fiscal deficit level for FY19 at 3.3 % of the GDP as against the Fiscal responsibility and Budget Management act target of 3%, reflects a tight rope walk undertaken by the Finance Minister to cut reckless and unwanted non-planned expenditure and accommodation of larger resources for planned and productive purposes like creation of Infrastructure, affordable housing, Agriculture and Education leading to generation of sustainable job opportunities for the masses. Also,a near status quo maintained by the Government on the direct and Indirect Taxes front,extension of Mudra loan facility window to the Micro,small and Medium Enterprises (MSMEs),a renewed focus of Pradhan Mantri Awas Yojana for the Rural populace, announcement of a slew of schemes including the construction of toilets to initiatives in the 3 areas of housing, power and health; the Finance minister drove the point that the budget devotes attention to all sectors, ranging from agriculture to infrastructure.

However,strictly evaluating the Budget overtones from a neutral observer’s perspective it definitely has inbuilt traces of Populism and caution with the General elections slated in 2019. Thus,with around 27 budgets,presented by various Finance Ministers under different Government regimes since 1951,it has always been a very debatable and contentious to ascertain the correct impact of Budget on the economy of the day.

Therefore, in conclusion,if one were to revisit the budget chapters of history;there are certain like - Pandit Nehru’s maiden budget of 1958 during the Second 5 year plan period of India,Charan Singh’s ambitious Janata Party budget in the post Emergency era, Dr.Manmohan Singh’s watershed Budget spelling “Manmohanomics” in the post liberalisation era to P Chidambaram’s United Front Government Budget in 1997 which emphasized on flushing out black money from the economy through the Voluntary Disclosure of Income Scheme (VDIS); the Modi Government’s budget of 2018 with a vision of “New India” could at least be safely accepted as “a booster dose for Rural India with sustained Agri - push.” However,how tangibly the initiatives of Budget 2018 suitably and inclusively contribute to the Economic growth and development of the nation in the coming days and years would only been seen,tested,evaluated and observed in times to come !!!

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