Prime Minister Narendra Modi's
midnight “surgical strike“ of November 8 on black money has not only dealt a
body blow to growth in the last five months of fiscal year 2016-17, but it also
appears to have made life difficult for government's econ omists and the
finance minister. It was reflected in the Union budget whose most striking
feature was uncertainty.
With data still trickling in, it is
under standable and prudent that neither Fi nance Minister Arun Jaitley nor
Chief Economic Adviser Arvind Subramanian ventured to offer the real impact of
de monetisation. While presenting the Eco nomic Survey on January 31, Subramani
an urged journalists to not speculate and stick to his presentation. His Survey
guessed demonetisation will shave off be tween 0.25 and 0.5 percentage points from
GDP growth. It projected the real GDP growth for 2016-17 at 6.5%.The Inter
national Monetary Fund, taking demon etisation into account, cut India's GDP
forecast for 2016-17 to 6.6% and for 2017 18 to 7.2%.
The medium-term fiscal policy state
ment in the budget emphasises that the effect of the note-ban would be short
term and probably end by March 31.
Some assumptions, however, appear to
indicate under-confidence. The budget says there will be a marginal dip in
growth in the remaining months of the fiscal year. Factoring that in, the
government has estimated nominal GDP growth for 2016-17 at 11%, lower than the
Central Sta tistical Office's (CSO) projection of 11.9%.
The CSO estimate, which does not
take into account demonetisation, puts real GDP growth at 7.1%. That means CSO
has an average inflation expectation of 4.8%.
If inflation rate averages at 4.8%,
then real GDP growth, according to budget num bers, should be 6.2%, lower than
the Eco nomic Survey's projection of 6.5%.
To be fair, if the rate of inflation
contin ues to dip, the number could be closer to the Survey's prediction. The
Survey says economic output in 2017-18 would likely be between 6.75% and 7.5%.
That is on the assumption that the economy will bounce back to normalcy and the
effects of demonetisation would not spill over into the next year. It is not a
certainty.
The government's revenues shot up in
the first nine months of the year but again the trend may not hold in the last
quarter as a sizeable amount of tax would have been paid in advance before
December to use up old notes of `500 and `1,000. The last two months of the
financial year are also when investments see a spike and consumer spending dips
as individual taxpayers put money in savings instead of discretionary spending.
Expensive Borrowings
About 18 years ago, the government
created a new mechanism to account for its liabilities in small savings and
public provident fund without affecting the fis cal deficit. It created a
National Small Savings Fund (NSSF) which aggregates money from all savings
schemes such as Kisan Vikas Patra, National Savings Certificate, Sukanya
Samriddhi Account and others. Until now this money was on-lent to states and
the rest was borrowed by the Centre. In the past few years, however, states
have declined NSSF funds as it is much cheaper to borrow from the market. Only
Arunachal Pradesh, Kerala, Madhya Pradesh and Delhi continue to borrow from the
NSSF.The Centre takes on the rest of the accumulation in the fund.
The interest rate at which the fund
lends to the government is now 8.8%. It was 9.5% until August 2016. To compare,
the government borrows through its benchmark 10-year bonds from the market at
6.4-6.5%. Last year, the Centre borrowed `50,890 crore from NSSF. This year, it
already borrowed `1,07,209 crore up to December, according to the government's
accountant. The budget expects the final number at the end of this fiscal year
to be `90,376 crore and a little over Rs 1 lakh crore next year. The budget
says it uses this money to pare down market borrowings. Consequently, the
interest cost of the Centre would go up from 33.9% to 34.5% of net revenue
receipts. It would also add to the fiscal deficit in 201718, Union budget
documents show.
The NSSF rate cut in August was
followed by a cut in small savings rate in September. In the coming months, if
interest rate pressure builds, the government could cut both the NSSF rates as
well as savings rates, both administered by the finance ministry. The small savings
rate comes up for review in March.
The 2018 Budget is likely to be the
last full budget of the Modi government as 2019 is an election year. With
economic growth certain to slow down this year and revival in the next
remaining a hope, the achhe din promised by the prime minister may take some
time to arrive.
Source: Economic Times
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