Setting out the Budget agenda

The third Narendra Modi government will present its second budget on February 1 next year. The deliberations for the exercise are already underway and the Prime Minister’s interaction with economists on Tuesday was an important part of the exercise.

The forthcoming Union Budget will be presented in a radically different economic environment compared to its predecessor. The United States (US), the world’s biggest economy has re-elected Donald Trump as its president who’s vowed to make his economic policy more transactional, mercantilist, inconsistent and unpredictable. As one of the biggest service exporters to the US and a country where capital flows have a critical role in balancing the external account, India will have no choice but to deal with this undesirable mutation.

What does this entail for the budget, which is largely a reflection of the government’s domestic economic priorities? Three things can be listed. One, capital markets will like more reassurance in terms of a consistent and predictable fiscal glide path to compensate for what is otherwise a turbulent external economic environment. Ideological judgments aside, this will have repercussions on the government’s borrowing costs. Two, the government will toy with the idea of tweaking some customs duty slabs to please the mercantilist instincts of the new US president. Once again, there is nothing wrong with the idea per se, but the question is when and how rather than whether to do this. The more important issue facing the budget will be the question of addressing what clearly looks like a slowing growth momentum in the economy. When read in light of the first two constraints, a Big Bang fiscal stimulus or a more aggressive export push seems less feasible right now. So, what can the government do to address this?

Will the government take the incrementalist approach of doing nothing radical and waiting to see whether private capex and growth recover on its own? This is in line with the Viksit Bharat (developed India) in 2047 goal. Or will it try and tackle the problem from a redistributive perspective, which gives some tax relief to the non-rich so that the profit-wages skew — even the Chief Economic Advisor is talking about it now — is corrected? This is where it becomes a political rather than just a technocratic economic call. Pre-budget interactions are mostly about judging and collecting the sentiment around these choices.