5 Challenges Arun Jaitley Faces In Government's Last Full-Year Budget

Rising crude oil prices are putting upward pressure on inflation while the government has limited room for a stimulus, say experts.

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5 Challenges Arun Jaitley Faces In Government's Last Full-Year Budget

Arun Jaitley needs to boost growth for an economy that's slowing down to a four-year low.

Budget 2018, to be unveiled on February 1, would be the last full-year budget of the current NDA government as general elections are due in 2019. "This year, the finance minister faces a unique dilemma of balancing growth and inflation amid rising crude oil prices and bond yield," said domestic brokerage Angel Broking in a note. Rising crude oil prices are putting upward pressure on inflation while the government has limited room for a stimulus, say experts. "There is no doubt that the finance minister needs to perform a tough balancing act," said Ishita Sengupta, partner at PwC India.

1) Economic Growth: Finance Minister Arun Jaitley needs to boost growth for an economy that's slowing down to a four-year low. Economic growth in the fiscal year ending March 31, 2018, may slow to 6.75 per cent and then may rebound to between 7 per cent and 7.5 per cent in the next fiscal, according to Economic Survey 2017-18.

2) Fiscal Constraints: The finance minister has only limited room for giving a big push to economic growth. For the current fiscal year, the fiscal target is 3.2 per cent and the government is unlikely to meet that goal. Economists have already warned that bond yield volatility could rise further if the government deviates significantly from fiscal discipline. "Deviation from fiscal discipline may introduce further volatility into yields," ICRA analysts Anjan Ghosh and Aditi Nayar wrote in a note. Higher bond yields imply higher borrowing cost, which will hurt economic growth.

3) Global oil price: Global oil prices have risen over 40 per cent since June which has driven prices of domestic fuels such as petrol and diesel to new highs. Higher fuel prices are putting upward pressure on inflation. Also, there have been calls for reducing excise duty on petroleum products. Any excise duty cut on petroleum products will mean lower government revenues. Chief Economic Advisor ArvindSubramanian said every $10 increase in global crude prices hurts economic growth by 0.2 per cent to 0.3 per cent.

4) GST collection: Halting two months of decline, the GST collections gathered momentum in December, rising to Rs 86,703 crore. But it is still down from over Rs. 95,000 crore collected in July and over Rs. 91,000 crore in August. However, some analysts are optimistic that GST collections will pick up in the future as economic growth accelerates and the government takes more measures for compliance. According to PwC leader Pratik Jain, increase in revenue collection is on expected lines and it means that gradually GST is stabilising and transition issues are waning.

5) Tax cuts: The finance minister will be under pressure to moderate the tax rate for industry. In his Budget speech of 2015-16, Mr Jaitley had proposed reduction of the rate of corporate tax from 30 per cent to 25 per cent over the next four years. With the US substantially cutting corporate tax, the minister will also need to keep India's tax rate globally competitive, say experts. Last year, the finance minister had reduced the income tax for small companies with annual turnover of up to Rs 50 crore to 25 per cent.

Economists say that Budget 2018 should announce policies to kick-start the investment cycle, which will help put economic recovery on a firmer footing. Leveraged private sector balance sheets and low capacity utilisation have hit the investment cycle. The onus for revival in the investment cycle, say economists, rests with the government through infrastructure spending. Falling steadily over the past few years, gross fixed capital formation (as a percentage of GDP) in India was 27 per cent in 2016, according to World Bank indicators. Global brokerage Morgan Stanley remains optimistic of a recovery in private capital spending in 2018 as demand conditions improve. "There is a need to stimulate the private sector investment cycle," said Lakshmi Iyer, head of fixed income at Kotak Asset Management.

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