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Will we miss the budget opportunity? -Jayati Ghosh
-The Indian Express

Post-demonetisation, a reversal of the slowdown would require enhanced public spending. It doesn’t appear to be forthcoming.

Given the economic uncertainty around the world and the demonetisation-induced domestic downturn in the Indian economy, preparing this year’s Union budget was never going to be an easy task. But the Modi government seems determined to make its task harder. It has managed to generate expectations — that will almost inevitably remain unfulfilled — through a weird combination of denial of the manifold ill-effects of demonetisation, encouragement of all sorts of ideas around the concept of universal basic income, and simultaneous acceptance of relatively rigid fiscal targets.

But consider first the timing of the budget announcement, in the context of the enormous complexity of the fiscal projections for this year and the estimations for the coming year that must underlie the budget-making exercise. This is the first year in which the presentation of the Union budget has been put forward by a full month, ostensibly to ensure that the legislative approval for its provisions can be completed in the two months before the beginning of the new financial year on April 1. This may sound reasonable. But even in a normal year, there could be several problems with presenting the budget early. These problems go beyond the political concerns that have been expressed by the Opposition parties. Even in a normal year, it would be problematic to project annual figures for anything — GDP, tax revenue collections, even public spending — on the basis of data for only the first seven or eight months. But this is no ordinary year. Demonetisation and the subsequent cash shortage have ravaged the economy. We know that there has been some severe adverse impact, but we do not know how much, how pervasive and how wide, deep and prolonged such effects will be.

The Central Statistical Organisation obliged the government by bringing out its own advance estimates of the GDP, a month in advance, to assist the budget-making exercise. But since it could not factor in any of the effects of demonetisation, the advance estimates provide us (and the finance ministry) with precious little clue of the likely GDP. The “safe” estimate only slightly lowered the expected rate of GDP growth to 7.1 per cent this year, which is certainly an over-estimation.

Data from other sources point to dramatic declines in informal economic activity, and even reductions in formal activity because of the declining demand and breakdown of supply chains, as well as falls in employment, wages and incomes of the self-employed. These are not processes that can be undone in a month or two. And since the cash crunch still persists, the adverse impacts continue to put a further squeeze on current and future economic activity and investment plans. So economic activity will definitely decelerate beyond the CSO’s projection.

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