The Economic Survey presented today, effectively, forms the backdrop for the Union Budget that will be presented tomorrow. In fact, the broad theme of the Union Budget will be determined by the Economic Survey. Hence it is essential to understand the kind of growth, inflation, fiscal deficit and expenditure numbers that the government is talking about. These projections will set the tone for the Union Budget.
Fiscal Deficit is under Control:
That seems to be the primary message of the Economic Survey. The original target of 4.1% fiscal deficit in 2015 and 3.6% fiscal deficit in 2016 now seems to be perfectly achievable. To an extent it can be attributed to the sharp fall in oil prices as well as a fall in prices of other commodities. This has led to a transfer of wealth from oil producers to oil consumers like India. Fiscal Deficit here refers to the borrowings that the government needs to undertake to bridge the revenue gap. But more gratifying is that the Current Account Deficit has been projected at 1.3% for 2015 and below 1% for 2016. That means there will be less pressure on the Indian rupee.
Growth is back:
One can argue that the higher growth is due to the change in methodology. But even discounting that, the green-shoots of growth are clearly visible. A growth rate of 8.1%-8.5% for 2016 now seems achievable and if reforms are implemented in right earnest, then even double digit growth is entirely plausible. Another factor aiding real growth is falling inflation (5-5.5% for 2015-16). This again owes largely to falling prices of oil and commodities, but as long as these trends are here to stay, India can be rest assured.
Manage Expenditure better:
The big challenge for the government will be propel growth without letting fiscal deficit go out of hand. The government is expected to take a tough stand on subsidies as well as on operating expenditure of the government. But at the same time, this budget will also be a focus year for defence expenditure. And that may compensate for a lot of expenditure that will be cut. But the clear message of the Economic Survey is that growth and infrastructure investment will have to be given a big push without compromising on fiscal deficit targets. That means more private public partnerships (PPP), more innovative sources of financing and cutting edge techniques like securitization wherein the risks of projects can be packaged, distributed and shared.
So, how does it set the tone of the Union Budget?
A few themes clearly emerge from the Economic Survey. The Union Budget will be high on feel-good factor (the term invented by a previous BJP finance minister). One can expect tax sops, higher exemptions and simpler procedures; measures that will help the vast Indian middle class. Defence expenditure could see a sharp rise and that could have a lot of spill-over benefits. There will be a strong focus on fiscal prudence and the focus will be risk sharing between the government and private parties. The budget may mark a shift away from populism to greater reforms with long ranging implications.