rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » Modi's mini Budget: Experts divided on fiscal impact

Modi's mini Budget: Experts divided on fiscal impact

January 03, 2017 14:55 IST

PM's announcement were focused on those most affected by the note ban.

Finance Minister Arun Jaitley and Prime Minister Narendra Modi

Economists are divided on whether Prime Minister Narendra Modi's populist schemes announced on New Year's eve will add to the government's spending burden for this year and the next. While most expect the net expenditure on Modi's sops to be incremental, some say it will add to the Centre's burden.

On Saturday evening, Modi presented a mini Budget of sorts at the end of the 50-day demonetisation exercise.

His announcements were squarely focused on those most affected by the note ban including farmers, small businesses, women, senior citizens, poor, and the lower middle class.

There were interest rebates and waivers for low-cost housing and farmers, respectively, credit limit hikes and tax incentives for small businesses, doubling the corpus of irrigation fund under NABARD, depositing cash directly into bank accounts of expecting mothers, and fixed high interest rates on bank deposits for senior citizens.

The Centre will fund or underwrite most of the announcements that Modi made.

Economists say the cost of these schemes will be one-time and rather incremental. "This will be a small amount. Although the government has not provided any figures on the cost of these steps, one can expect the Budget to have those details," said D K Srivastava, chief policy advisor, tax and regulatory services at EY.

"This government seems committed to meeting its fiscal deficit target for this year. The amount for the schemes announced by Modi are unlikely to put a dent to that," said Madan Sabnavis, chief economist with Care Ratings.

Sabnavis said the Centre also expects additional revenue from the latest voluntary disclosure window, which would help in some ways.

The fiscal deficit target for 2016-17 is Rs 5.34 lakh crore, or 3.5 per cent of gross domestic product.

For April-November, fiscal deficit has reached 86 per cent of the full-year target. This is quite normal, with the last quarter of the year (January-March) usually showing a fiscal surplus.

However, some analysts say that whether the burden of these sops affect the Centre's fiscal math or not depends on other factors.

"The pressure is on the revenue side of things. How much of an impact these sops have depend on revenue collections. It is hard to say now," said D K Joshi, chief economist, CRISIL.

For next year, though, things could be entirely different. The 2017-18 Budget is expected to be a very populist one. Yet, spending should not be a problem for planners in the finance ministry; a spending spike could be the central theme of the upcoming Budget.

This also means that the Centre may borrow more and is now unlikely to stick to the fiscal deficit target of three per cent of gross domestic product for 2017-18 as mandated by the existing Fiscal Responsibility and Budget Management (FRBM) Act.

Even in a pre-Budget meeting with Finance Minister Arun Jaitley last month, economists and economic experts are said to have advised the government to stop worrying about fiscal deficit targets and focus on increasing capital expenditure and social sector spending.

The idea is that despite years of efforts to rein in fiscal deficit, the rating agencies have not upgraded their long-term sovereign ratings. In such a scenario, and at a time when major developed and developing economies were increasing federal spending, India should do the same.

Image: Prime Minister Narendra Modi (right) listens to Finance Minister Arun Jaitley during the Global Business Summit in New Delhi January 16, 2015. Photograph: Anindito Mukherjee/Reuters

Arup Roychoudhury
Source: