Sunday Interview: The Budget is not based on crazy assumptions, but on realistic ones

Dharmakirti Joshi, chief economist at Crisil, the Indian arm of one of the world’s biggest rating agency Standard & Poor’s, talks to Pawan Bali about the various aspects of the Union Budget and its impact on the economy.

What is your assessment of the Union Budget?

It is clearly more focused on inclusion and distribution than on growth. Whatever the Budget has proposed is for small sectors, farmers, the MSMEs and the underprivileged. Same is true of healthcare and job-related proposals.

So you don’t think it is a growth-oriented Budget?

Budgets can stimulate growth via spending. The Budget didn’t have much leeway for a big spending push due to fiscal constraints. Actually, the total expenditure growth as percentage of GDP will come down in 2018-19. If you become very aggressive with spending, then your fiscal target goes for a toss. Already there was fiscal pressure that was building with slippage of fiscal deficit target by 30 basis points to 3.5 per cent of GDP in 2017-18 as against the budgeted estimate of 3.2 per cent.

The Budget talks about more loans to small businesses through Mudra, increasing investment in infrastructure, especially rural infrastructure, and in roads. Will these measures boost growth?

It will incrementally help to create more jobs. They are trying to get various schemes together, even MGNREGA and use them to create rural infrastructure and rural roads — roads that connect farmers to markets. If carried out successfully, it will promote the welfare of farmers by improving market access and will have a positive spillover effect on growth and jobs.

Finance minister Arun Jaitley failed to achieve the fiscal deficit target for 2017-18 and for this year it has been set at 3.3 per cent against the roadmap which was 3 per cent.

For 2017-18, the fiscal deficit slipped by 30 basis points from its target. The government says that it is largely because the Goods and Services Tax revenue was available for only 11 months. The fiscal account came under strain despite the government exceeding its divestment target after many years. Now for this year it is better to be realistic and target a number which is achievable than go for an aggressive target of 3 per cent. India has been missing the 3 per cent target for quite some time and setting unrealistic targets and not achieving them dents credibility. Achieving the target for 2018-19 will largely depend upon whether revenue mobilisation is successful, particularly on GST front.

Even in 2017-18 we had high fiscal deficit after the government cut capital expenditure.

The budgetary allocation for capital spending has been cut down. This was 12 per cent lower than what was budgeted in 2017-18. But if you look at the total capital outlay, it has increased. The reason is that capital outlays also includes other public sector enterprises and the government has increased their capital spending via what is called internal and extra budgetary resources (IEBR) which doesn’t show in Budget accounts of the government. The capital spending of the general government, including the public sector, has not suffered but the ability of the Central government to finance that spending through Budget has come down. Capital spending is happening because PSUs are able to generate more funds and are using their internal resources for investing.

Do you see the government achieving 3.3 per cent fiscal deficit target in 2018-19, as it is a pre-election year?

It all depends on how much growth picks up. I think the chances of achieving it are there because the government in some of their assumptions has been very conservative, like growth they are assuming at 7.2 per cent, oil at $75 per barrel, which is a very high number. So the Budget is clearly not based on some crazy assumptions. It is based on very realistic assumptions and that too on the conservative side. But whether they will be able to garner GST revenue is not very easy to predict right now because tax rates are yet to stabilise. I think that the increase in the number of new businesses who are now in the tax net and new taxpayers who are in direct tax net should lead to revenue buoyancy. The government will also need to ensure that they pursue their Rs 80,000 crore divestment target with the same zeal as in 2017-18.

The Economic Survey has outlined rising crude oil prices as a major threat to the Indian economy.

If oil prices rise very fast and sustain at high levels, it is a threat to growth, a threat to fiscal deficit, to current account deficit and it is a threat from inflation perspective. But given the changed global scenario, it does not look like oil will sustain at high levels for a long time.

The Economic Survey hinged its hope on exports to push growth to 7.5 per cent. Do you think export growth can be pushed?

I do think exports can show very healthy growth in 2018-19. They did not do that well in 2017-18 due to domestic constraints from GST which had hit exporters as they were not able to get timely tax refunds. All those constraints are getting removed. And as far as the global scenario is concerned, global growth is best ever since the global financial crises of 2008 and trade is also doing well. In that environment, exports should do well because domestic constraints that were holding us back are getting relieved. I do think exports will make a healthy contribution to growth in 2018-19.

Do you see this Budget getting private investment cycle to restart?

Private investment will take time to happen; there are many factors that need to come together. There are some green shoots on private investment but broad-based private investment recovery is not on the cards this year.

While the government has unveiled a Rs 2.11 lakh crore recapitalisation of state-owned banks to boost lending, many private companies right now are not ready to expand.

That is what I was referring to. Some of the companies are still in the process of deleveraging and there is also fair bit of excess capacity, particularly in the manufacturing sector. The willingness to invest is not high among private companies due to business considerations. That said, private investment is improving but it is not likely to become key driver of growth in 2018-19.

Do you think the Budget lacked big ideas?

We don’t need more big ideas. We need to implement whatever we have committed: ensure that power reforms become successful, bank recapitalisation is done quickly, bankruptcy system works and GST glitches are sorted out. If you achieve these, it will be enough.