India: FM expected to exercise fiscal prudence in Budget 2018

  • It’s not difficult to hazard that the last full budget before the elections will see Finance Minister Arun Jaitley stress the government’s agenda for rural India and urban poor. He is also likely to avoid slashing the corporate tax, for example, lest it offer fodder to the Opposition to call the budget pro-rich.
  • If the FM discards the Fiscal Responsibility and Budget Management (FRBM) panel’s fiscal deficit target of 2.5% of GDP for 2022-23 – India’s credibility as an investment destination will be severely dented. And rating agencies could see the move as hobbling the country’s ratings.
  • Besides, the FM has little leeway when crude prices are inching towards USD70 a barrel and petrol prices in Mumbai was INR80 per litre early this week affecting ordinary citizens.
  • India imports over 82% of its crude requirement and an increase by a single dollar means it inflates the country’s net import bill by USD0.5bn when factoring in Petroleum Planning and Analysis Cell’s estimates for FY 2017-18. Similarly, a spike in the minimum support price (MSP) to insure farmers against any sharp fall in prices, will push food inflation, something that the government can ill-afford in an election year.
  • And that’s possibly why Prime Minister Modi hinted in an interview to Times Now earlier this week that the forthcoming budget might not be predictably a populist one.
  • It won’t hence be a surprise if the FM lays down a rural roadmap on how to double the farmers’ income, instead of merely inflating the farm subsidies for FY 2018-19 and squandering a part of the exchequer to gain a political brownie point. On employment generation, FM is likely to follow what the PM stated in public that the plan would emphasise job creation rather than seeking of jobs.
  • Yet, if people in the know are to be believed, Jaitley may substantially increase outlays in housing and infrastructure, the sectors that will create immediate employment avenues.
  • But the bigger question is whether the BJP’s election-winning machinery under PM Modi and national party president Amit Shah really needs a populist budget to register yet another victory? The Modi-Shah duo effected a resounding win in Uttar Pradesh immediately after the demonetisation of high-value notes and the subsequent job losses.
  • Then, again, it retained its stronghold in urban Gujarat which vehemently protested the rolling out of the GST. Maybe, the BJP’s new election-winning strategy does not really need populism ahead of polls, buying enough elbow room for the finance minister to exercise fiscal prudence.

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