Thursday, 2 February 2017

Budget 17 : Macro Economic Scenario & Prospect Assumptions

This budget comes at a critical juncture; in fact, I daresay the scenario confronting the Indian Economy is at a stage that is far more worrisome than in most other years’ budgets. This isn’t just due to demonetization; the scenario on the global front with declining exports, rising protectionism is one significant challenge; the internal scenario in terms of numbers also does not inspire confidence. Thus, the major challenge in front of the Government is to rekindle Growth; and any analysis of the Government will be on this parameter as far as I am concerned.


THE MACRO ECONOMIC SCENARIO
The performance of the industrial sectors based on the Index of Industrial Production (IIP) comprising mining, manufacturing and electricity reveals a modest growth of 0.4 per cent during April-November 2016-17 as compared to 3.8 per cent during the same period of 2015-16. As per the sectoral classification, the production of manufacturing sector declined by 0.3 per cent during April-November 2016-17. The electricity and mining sectors registered growth rates of 5.0 per cent and 0.3 per cent respectively during April-November 2016-17. It needs to be noted that the manufacturing sector declined and the mining sector registered a low growth; whereas core sectors did well


Inflation does not seem problematic as of now; while the Banking Sector is showing some signs of stress due to rising NPAs; Agricultural Credit seems to be on the target taken; As per the First Advanced Estimates released by the Central Statistics Office, the economy is estimated to grow at 7.1 per cent in 2016-17, as compared to the growth of 7.6 per cent achieved in 2015-16. The growth in agriculture, industry and services is estimated at 4.1 per cent, 5.2 per cent and 8.8 per cent in 2016-17 as opposed to 1.2 per cent, 7.4 per cent and 8.9 per cent respectively in 2015-16. Growth rate of industry sector declined in 2016-17 mainly on account of contraction in mining & quarrying and moderation of growth in manufacturing sector. It is noteworthy that Agriculture has rebounded from two low growth years; but Manufacturing, as seen above, is lackluster. Services is yet again driving Growth…


Finally, there is an external scenario that needs to be kept in the backdrop. Our external debt seems reasonably healthy with a predominance of long-term debt; and FER is great at 360 Billion USD, giving over 12 months of Import cover, which is creditable. Exports remain a significant challenge riding on global concerns primarily; From the above points culled from the macro economic factors, it can be seen that the major challenge is boosting confidence and investments in manufacturing. The growth in fixed investment at constant prices declined from 3.9 per cent in 2015-16 to (-) 0.2 per cent in 2016-17


ASSUMPTIONS IN THE BUDGET
For this, let me give a straight quote from the Macro-Economic Framework Statement, present in the Budget Documents : The prospects for Indian economy for the year 2017-18 need to be assessed in the light of emerging global and domestic developments. Indications are that global economic growth is gradually picking up. This augers well for Indian exports which are highly responsive to the dynamics of global economic activity. On the other hand, the increasing global prices of oil and other key commodities may exercise an upward pressure on the value of imports. Uncertainty on account of significant external political developments, global interest rate behaviour and capital flows pose potential downsides. Domestic demand is expected to get a boost from accommodative monetary policy and the unleashing of domestic trade and consumption as the economy gets remonetised to the required levels.


QUESTIONS THAT SHOULD BE ASKED
Thus, when we are analyzing the budget, the key questions can only be along these lines:  

·       will it encourage investment and growth in the manufacturing sector?
·       Will it encourage and enable demand and consumption growth?
·       Will it enable and sustain further improvement in Agriculture?

 If the answer to these questions comes as a yes, then the budget is a great budget. That is the litmus test; the annual budget exercise must deal with the macro economic scenario confronting a nation; that is why I have presented this macro economic statement for whosoever reads my blog.


ANALYSIS – LONGER TERM, BASIC INDICES
There are other, longer terms issues and challenges; particularly, as stated in my previous article on this – Defense, Education and Health. The second and the third have unfortunately been perpetual challenges for us, regardless of the political party in power. We just do not concentrate on Education and Health; it is frankly beyond my understanding as to how a nation can become developed without due focus on the basic indices of Human Development. I understand there are resource challenges – but surely we can prioritise properly, and find ways to spend more on these?


The continuing slide in Defense Expenditure as a percentage of GDP, again independent of political party in power, is frankly befuddling. On the one side, we all click like on social media on army posts, idolize the armed forces-  as indeed we should; while on the other side, we just don’t care when government after government does not do enough. This has even led an Army Chief to once declare “We will fight with what we have” or words to that effect in 1999. Now we are lucky such a scenario is highly improbable today; but shouldn’t we, as a people, empower the government, enable them to spend more on defense? This isn’t a Government failure – it has a series of challenges, and needs to prioritise. I understand and respect that prioritization; it is trying to do its best under extremely difficult circumstances and finite resources. But that is precisely why we need to tell the Government – go ahead and spend more on the people who protect us!


CONCLUSION
Thus, as we prepare to go deeper into the budget analysis, we can see the overall scenario confronting the Government; it has many challenges and finite resources. Rather than criticize, or indeed praise, let us be logical, grant the difficulties, accept the good points, and try and develop a dialogue around how it can be improved.  I see the reverse happening – people are either crying foul and say bad budget; or jump in joy and praise the budget to high heaven. Now I respectfully submit – no one is that good on this planet. Any budget is going to have good as well as not-so-good points in an economy as diverse as ours. Bhakti is no solution; we have to develop a dialogue



And a dialogue is exactly what I don’t see taking place in India today; it  is too polarized a scenario. Cant you say the Government erred when it made a mistake? Cant you conversely praise the Government all you want to when it did good? If the assumption is no Government can a mistake, then I can only register my surprise at the naïveté on display, or the blind followership on display. I too like this Government – it has done many a great job – administrative reform, GST etc to name but a few… Before I move onto the core budget, I would like to underline, once again – are we concentrating on the basic parameters of Development – Namely Education & Health – as a nation, as a people?




Macro Economic Details From : Macro-Economic Framework Statement

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