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25
January 2017
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Industrialgrowth
(The Total
Investment & Insurance Solutions)
The major dilemma for the finance
minister in the Union Budget FY2017-18 is whether a fresh round of fiscal
stimulus will be required to offset some of the ill effects of demonetisation,
says India Ratings and Research (India Ratings) in a report. The Total Investment
& Insurance Solutions
Owing to the dramatic decision of
cancelling Rs500 and Rs1,000 notes and the chaos created in its aftermath,
India Ratings estimates that the GDP growth in FY2016-17 will be lower at 6.8%
(earlier estimate was7.8%) and the adverse impact may flow into FY2017-18 too.
Given the backdrop of lower growth, India Ratings expects the government’s
budget to focus on growth, implementation of GST, attracting investments,
boosting revenue, improving ease of doing business and of capital inflows. The Total Investment
& Insurance Solutions
However, the government has to not
only hold to existing growth but also accelerate it. This would be tough
because of demonetisation or de-legalisation of high denomination currency
notes. As nearly 90% of the transactions in the country are done in cash, this
move has impacted the cash economy such as real estate/construction, gold and
the informal sector which has linkages with the formal sector. “Therefore,
where business in the informal sector has come to a grinding halt or down by
30%-40% and beyond, it has resulted in either ‘nil’ or lower income
generation,” says the report. The Total Investment & Insurance
Solutions
India Ratings estimates that the
ripple effect of demonetisation “is proving to be quite disruptive for the
overall economic activity and employment. As the days associated with the loss
of liquidity are getting longer, the impact is becoming severe and more
pronounced in the informal sector. This in turn has the potential to push the
default rate higher in both the formal and informal markets. There are stories
about the breakdowns in payment systems choking trading activities across the
board and loss of liquidity leading to job losses. Disruption in trade in
majority of the cases has permeated to the level of small vendors and street
hawkers.”
“Therefore, as the government
embarks on preparing the FY18 budget, the central question before it is -
whether a fresh round of fiscal stimulus is required to offset some of the ill
effects of currency de-legalisation. Indian public finances (central, state and
local bodies) suffer from committed expenditure syndrome, as a large part of
current expenditure is inflexible and cannot be reduced/curtailed in the
short-run,” notes India Ratings.
“Therefore the fiscal room for
stepping up expenditure has to either come from higher revenue collection or
higher fiscal deficit. With growth expected to fall not only in FY2016-17 but
also in FY2017-18, the government is clearly staring at lower tax collection,”
argues India Ratings.
Indeed, for FY2016-17, India is
staring at lower revenue collection than was budgeted from telecom spectrum
auction and the likely shortfall in disinvestment. If so, the government
finances do not appear to be heading towards budgeted numbers. However, the
government may still be able to cap the fiscal deficit at 3.5% of GDP due to a
combination of higher growth in indirect tax collection than budgeted during H1
FY2016-17 and expected tax revenue garnered from Income Declaration Scheme 2016
and the proposed Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016, notes India
Ratings.
The Total Investment & Insurance Solutions
“Therefore, the headroom for the
government to provide a stimulus either from the consumption side or investment
side is quite limited and if a boost is to be provided then perhaps it will
require compromising the fiscal deficit target and the fiscal consolidation
process. Any move in this direction will have its consequences. Moreover,
unlike 2008, the slowdown in growth this time around is of our own making and
the rationale for relaxing fiscal deficit target/consolidation process will not
be viewed positively,” remarks India Ratings.The Total Investment
& Insurance Solutions
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