Union Budget 2017-18: Crystal Ball Gazing the FM’s announcements

As the Finance Minister presents the Union Budget 2017-18 tomorrow, the Indian economy is staring at slowing growth during forthcoming fiscal year.

Recently, the International Monetary Fund (IMF) in its latest update to the World Economic Outlook (WEO) has slashed India’s growth rate for 2016 by 1 percentage point to 6.6% and for 2017 by 0.4 percentage points to 7.2%. The Finance Ministry’s Economic Survey 2016-17 is a tad more positive, putting India’s growth for the fiscal at 7%; but puts the lower bound for 2017-18 growth at 6.75% (the upper bound is 7.5%).

Continued indifferent impetus from the world economy, sluggish domestic activity in some sectors and most recently, the demonetisation drive are contributors to the slowing down in growth. While this will impact the economy as a whole, some pain points are expected to be particularly acute. At a macro level, below are 3 areas the budget could seek to address, along with possible ideas on how to address them:

1. Incentivising industrial growth: India’s industrial production has been extremely disappointing during 2016-17 so far, amounting to 0.4% for the April-November 2016 period. This compares unfavourably to the 3.8% growth seen during the same period of the previous year. Drilling down to the sectoral composition of industrial production reveals that the manufacturing sector, which accounts for over 75% weight in the total, has shown a decline from the previous year. Within manufacturing, sectors that have been particularly suffering, like food and food products, apparel, leather products, machinery and furniture manufacturing would benefit from relief. Majority of the segments within this group would fall under micro, small and medium size enterprises (MSMEs); and in thus assisting these segments, the centre would also be supporting the critical MSME segment, which accounts for around 45% of India’s industrial output. MSME’s have been disproportionately impacted by demonetisation, and providing incentives to these segments could alleviate that as well.
2. Re-vitalising the capex cycle: Related to poor trends in industrial production is the declining trend in the capex cycle. Gross Fixed Capital Formation has posted negative growth in real terms for the first half of 2016-17, and the private sector is unlikely to be able to support it in the near term either. Which leaves the government to do the job. This is also the ongoing need of a developing country like India, which has constant need for government involvement in provision of public utilities like roads and water, for instance. However, the centre does not need to significantly inflate its budget to help capex spends at the margin, as I argue in a previous post (Can the centre attempt to re-boot the capex cycle?). In so far, as the budget can take the first steps towards ensuring that private sector capex also starts picking up; there can be measures on both the demand and supply side. On the demand side, provisions for investment allowances or investment credits to industries with requirements for ramping up investments are possible ideas. On the supply side, further re-capitalisation of the banking sector and boost to the Pradhan Mantri Mudra Yojana are potential ways to address the situation.    
3. Supporting public sector banks: Bank NPAs are a cause of concern, with a 47.5% increase in the cases of NPAs referred to them in 2015-16, compared to 2014-15. What’s more, the value of the cases being referred has actually declined by over 10%, suggesting that smaller borrowers are now unable to pay their loans. At a time when credit growth has waned to 5%, this is an even bigger challenge than otherwise. Thus, the need for further re-capitalisation of PSU banks and supportive treatment for loan loss provisions are some ideas for encouraging banking sector health.