From a purely macroeconomic point of view, the Budget has ticked all the boxes which makes this presentation a wholesome one. The government has not changed the GDP growth forecast and been conservative and stuck to the 10.5 per cent growth rate which presumably takes into account the forecast of 6.5-7 per cent real GDP growth in the Economic Survey. Against this background, the economic impact can be evaluated.
First, has fiscal prudence been maintained? The answer is an emphatic yes as the fiscal deficit target has been lowered to 4.9 per cent from 5.2 per cent (implicit after revised GDP numbers were out in May). Hence the basic message is that the government is keen on reaching the FRBM objective of 4.5 per cent next year and probably go faster towards the 3 per cent mark in future. Quite clearly the surplus gains from RBI transfers has been judiciously used to lower the deficit. There was a view that the extra money received would be spent on social welfare and capex. This has not been done.
Second, will the Budget generate employment in the short or medium run? The Budget speaks of direct intervention by the government in providing incentives to employers and first-time employees in the form of cash transfers and reimbursements. By focusing on first-time employees, it ensures new jobs are created. By also adding another carrot for higher skilling, subvention on interest is being offered for loans to study in domestic institutions. Hence the goal is creating a skilled labour force.
Third, will consumption increase? Here again the answer is in the affirmative. While the jobs created will automatically lead to higher income and consumption, direct action also has been taken to increase the disposable income of individuals who move to the new tax scheme. This is a good move as it gives options to taxpayers to use this income for consumption or savings. Hence, while no new measures have been announced for encouraging savings, the choice is given to the individual on use of tax saved.
Won’t trigger inflation
Fourth, will the Budget impact inflation? Here, as GST is outside the purview, there is limited scope for impacting prices directly. However, there has been reduction of basic customs duty for a series of commodities, some of which enter the consumption basket. In fact this will show more in core inflation and hence has the potential to lower headline inflation provided the producers pass on the benefits.
Fifth, will investment pick up? There has predictably been no change in the capex of the government which remains at ₹11.11-lakh crore. However, the Budget has focused a lot on inclusive development and highlighted four States that would receive special attention in terms of development. This includes Andhra Pradesh where loans will be facilitated for infra creation. There is hence a direct link to investment and it may be expected that there will be traction here in the next few years.
Sixth, has anything been done for the MSMEs? MSMEs play an integral role in terms of contributing to GDP, industrial growth and exports besides being one of the largest employment providers after agriculture. There has been special attention paid here in multiple ways. There is a credit guarantee scheme to ensure that they can borrow money for buying machinery. Banks would be devising new models to lend without collateral support. Further, SIDBI would be opening branches for lending in several MSME clusters. This can be seen as feeding into both employment generation and investment.
Seventh, will the capital markets be spurred? There were varied reactions from the stock market as the Budget was announced. Several sectors will be affected positively depending on how money is spent such as in housing, roads, railways, power plants, and so on. The capital-gains tax revisions have been a mixed basket with some rates going up such as for equity in terms of long term earnings, but coming down for real estate. Similarly, the removal of angel tax is a boost for start-up firms as also is the lowering of the corporate tax rate on foreign companies from 40 per cent to 35 per cent. Therefore, as the idea has been to simplify and harmonize rates, the overall impact would be balanced.
Bond market stability
Eight, will the bond market see any disruption? Here there is a big tick mark because by announcing a slightly lower borrowing programme compared with the Interim Budget, the market will remain unaffected. This means that there will be no change in the borrowing calendar of the government which will keep bond yields unchanged. This is what was observed with the 10-year bond yield closing at 6.96 per cent, the same rate as of yesterday (July 22).
Last, will these measures lead to higher growth in GDP? All put together there will be a positive stimulus on growth. There will be leads and lags in this context. While consumption impact will be immediate, employment generation leading to higher income as also higher investment driving output growth, will come with a hiatus depending on when the money is spent and the gains flow in.
The Budget hence has been comprehensive and been built largely around the Interim Budget presented in January. The overall size of the Budget remains almost unaltered and so is the borrowing programme. The medium term ideology is concentrated on employment and skill development which will lay the foundation for a better quality of economic growth in future.
The writer is Chief Economist, Bank of Baroda. Views are personal
Special attention has been paid to MSMEs. There is a credit guarantee scheme to ensure that they can borrow money for buying machinery. Banks would be devising new models to lend without collateral support.