Some Pointers on the imminent Budget issues: Score card and adjustments for Mr. Jaitley

As Mr. Jaitley is getting ready for his early budget announcements, the industry and the people of India at large would be waiting with a baited breath on the musings of the reform process, which has to now find traction with the effects of a demonetized paradigm, the unintended consequences included. Budgets set direction and is a vehicle to set expectations; on the other it provide us score cards on the reform process.

Demonetization cannot be ignored as it is the new kid on the block.

Thankfully we have large part of the money in circulation in cash form deposited back to the banks but only slightly above half of that has returned back into circulation in the economy in form of goods and services. On the other hand reliance on cash transactions have reduced, the exact percentage can only be ascertained over the next two quarters. In the mean time we have seen reduction in sales numbers for those businesses which rely on cash transactions; on the other hand the impact on agriculture has been found muted although some bit of rural spending had been seen to be postponed in the first month of demonetization.

To go back on the budget, first of all the third year’s budget normally is not dedicated to direction setting, but rather it is about making adjustments to a process that had been set up two years back. In all earnest, the results of the process in numbers, gives a mixed feeling on the robustness of the movement in raising GDP by allocating capital in those areas of the economy that would help domestic demand to firm up in a sustainable manner and also create supply responses adequately. It is also important to see whether the allocated capital has actually been disbursed and is effective in generating employment.

Mr. Jaitley will be giving us both the sides of the story, demand and supply, but we already have some estimates at hand.

Indian economy is most likely to scale down its growth projections from 7.6% to 7%; the advanced estimates indicate that demonetization has impacted half a percentage point surely so far.

But I would argue that the impact is probably much more. This was the year of the best monsoon of the recent times and the harvest has been far above average, which bodes well with the expectation that GDP growth should have been far better than last year. Unfortunately it is not.

But firstly let us look at some of the announcements of last year budget and how have we fared in that. The score card overall is not bad.

To start with last budget speech started with the pointer to the global economic trends, which this time remains far better placed with the U.S. and China moving on a steady growth engine, with the former putting in place a presidency that wants to move from fiscal fence-sitting to making things happen on the ground. Surely the effects of Brexit is yet to fully surface, which is the only dampener while oil and other commodity prices hold some sway of positive movement which makes the demand side of the equation look better.

Turning to India, the CPI inflation, which last year at this time was around 5.4% is now hovering at 3.4%, which by the way, is not entirely explained by demonetization. The steady fall of CPI inflation remained a characteristic trend in the entire second half of last year and now in spite of a positive movement in oil prices, CPI has been steadily trending downwards. The current account deficit is hovering around $3.4 Billion in the second half of last year, which has significantly come down from last year’s levels.

On inflation, India somewhat mirrors the global tendency of low commodity prices, but it is creditable to continue to show higher growth rates than the rest of the world while maintaining low inflation, which is a huge bonanza for the common man in general.

Last year the priorities of the budget were aimed at social sector programs like Pradhan Mantri Fasal Bima Jojna, Pradhan Mantri Krishi Sinchai Yojna & Krishi Vikas Yojna, which were all aimed at the agricultural sector and perhaps on the back of a good monsoon there is something to cheer on this when we see Mr. Jaitley talking about the results stemming from all three of them. We will be keen to see how the internet enabled supply chain activities including procurement has progressed and how these processes could be made cash less.

On the rural electrification projects we would like to see the progress and how far we have progressed against the 100% electrification goal of this government. Also would be interesting to see how MGNREGS allocations have progressed and what effects it had on the rural infrastructure and amenities.

On the road infrastructure building projects we had seen 8300kms being completed last year, the progress of this year also should be in line with last year. Of the Rs.55000 Crores awarded on this with additional coming from NHAI through bonds, financing has never been an issue so far.

The capital expenditure allocation to railways has been in excess of Rs.1.20 Lakh Crore out of which last year’s Capex alone was Rs.48000 Crores and it would be interesting to see the project completion status in this regard. The two major achievements to be reviewed are:

1. Surpassing 3500km of broad gauge line, 4000 km of track (commissioning) : 7km/day (av of 4.3 km/day) planning to go up to 13 km/day
2. Electrification: 10 years job to be done in 3 years, through project management & partnership with ministry of power: 2000km electrification

So progress on road and rail remain the building blocks for the economy and expectations are rife on this. Rail freight increases in the current times have seen some commodities getting impacted disproportionately like Coal; it is expected that some parity should be brought back and key account management policy should be set forth to dismember the cross-subsidy regime.

On the finance side of the economy, banking has come far from its woes of last year, although last year’s budget announced Rs.25000 Crores of allocation towards recapitalization of the public sector banks.

On governance and ease of doing business, India did progress some notches up, but it would be worthwhile to see actual foreign investments on the ground to believe that India has come to that threshold of attracting serious foreign capital rather than mere intent.

On the second part of the budget where Mr. Jaitley discusses the tax proposals, his job has been made difficult by some sectors like housing which remains always the center piece in creating avenues of growth and jobs. This time around he has a mixed bag that on one hand the interest rates have played ball and there are a slew of measures already announced that incentivizes housing investments, but they are by and large far short of the need of the hour.

That and the focus on GST implementation will form the rest of the deliberations.