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Monday / March 27.

Challenges to the Union Budget 2017

Arun Jaitley ready for the budget

By Dr. R S Bawa and Dr. Rajiv Khosla

The Union Finance Minister will be presenting his fourth Budget on the 1st of February. However, this budget poses more challenges with demonetization in the backdrop.

The challenges

Firstly, the date for the Budget has been advanced by one month which means that estimates will now be based on the data available only for first two quarters of 2016-17. Earlier, advanced estimates used to be released in February and included estimated figures for the first three quarters. However, advanced estimates for 2017 have been released in January, which means that they may not include some of the developments of the third quarter. Secondly, the fund allocation for Rail Budget will be intriguing. Thirdly, in the absence of plan and non-plan expenditures, it will be interesting to see how sectoral fund allocation is made.

Finally, in the wake of introduction of Goods and Service Tax (GST), assessment of revenue statements will be interesting to watch out for.

Previous budgets

Thus, keeping in mind the previous efforts that eventually led to containing the fiscal deficit by pruning the public expenditure in last three years; it becomes imperative to present a populist budget.
When the first union budget was presented in July 2014, it made hollow and ineffectual announcement of schemes. The next budget witnessed half-hearted efforts to boost public investment without adequate provisions for funds. The third budget was prominent because of the committee set up under N K Singh to review the Fiscal Responsibility and Budget Management (FRBM) Act. It was to examine if the government can have a target range for fiscal deficit, as against the current norm of a fixed number. Thus, keeping in mind the previous efforts that eventually led to containing the fiscal deficit by pruning the public expenditure in last three years; it becomes imperative to present a populist budget. Further, the adverse external and internal circumstances also call for counterattacking measures in the form of public investment.

External shocks

The election of Donald Trump as US President followed by a hike in the US Federal Reserve interest rate by 25 bps in December cast a negative outlook for the Indian economy. Firstly, it led to an increase in the dollar-rupee exchange rate followed by a flight of money from the Indian economy. Soon after Trump’s win, the Rupee started sinking and in November 2016, it fell 2.5%, the highest in the last 15 months. Similarly, foreign institutional investors withdrew more than Rs. 40,000 crore in the last two months.

Trump impacting the budget

Taking the economy by a storm | Photo Courtesy : BusinessInsider

Besides, the decision to cut crude production by the Organization of Petroleum Exporting Countries also had its ramifications.  Domestic growth fundamentals such as the GDP, Index of Industrial Production, Purchasing Managers Index and balance of trade; also deteriorated in the third quarter compared to the previous quarter. Adding to that, the demonetization drive created economic pessimism.

Under existing circumstances, the challenge before the Finance Minister will be to push the demand for all kinds of commodities in order to improve manufacturing and put the economic cycle of production, consumption and investment back on track. Hence, a populist budget not only assumes political compulsion but rather it is an economic necessity.


Dr. R.S Bawa is Vice-Chancellor, Chandigarh University
Dr. Rajiv Khosla is Head, School of Business, Chandigarh University
Featured Image Source : Civil Services India
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