Budget 2017 comes against the backdrop of a slowing economy - the Central Statistical Organisation (CSO) has estimated the economy's gross domestic product (GDP) growth to slow to 7.1 per cent in fiscal 2017 from 7.6 per cent in fiscal 2016.
This estimate does not factor in the impact of demonetisation, notes rating agency Crisil. In a pre-budget note, it notes the Budget has two immediate tasks cut out: assuage the shock received by private consumption from demonetisation, and bolster faltering investment demand. The advancement of the Budget presentation by a month gives the government that much more time to plan and implement its spending programmes before the beginning of fiscal 2018.
So far so good. But can the government do it and meet the FRBM target of 3 per cent fiscal deficit target?
Short of a miracle, ''no'', it concludes. India will have to prune its fiscal deficit by Rs280-350 billion from the level in the previous fiscal in order to reduce the fiscal deficit ratio (fiscal deficit/GDP, or FDR) to 3 per cent in fiscal 2018, as per the Fiscal Responsibility and Budgetary Management (FRBM) commitment.
That said, an additional spending window can be created if the target is relaxed to 3.5 per cent (provided the FRBM committee recommends it). In that case, the government will have to demonstrate credible steps to lift the tax/GDP ratio in the coming years to ensure medium term fiscal sustainability, and reduce debt/GDP ratio.
The good news, says Crisil, perhaps is, the bad news has already hit. Sagging areas of the economy have been identified, and the fiscal constraints, clearly drawn. The Budget has to perform a tight rope walk between kick starting the consumption-investment cycle and maintaining fiscal discipline. In the best-case scenario, some windfall from demonetisation can provide one time fiscal space in fiscal 2018.
Over the medium run, GST and steps to improve compliance will help raise tax/GDP ratio. But as we speak, expenditure will have to precede collection and compliance to spur growth, so some transitory relaxation of fiscal target may be inevitable in the coming fiscal.
On the contrary, if it turns out that the government has been betting on the wrong horses, we might be bracing ourselves for an even tougher winter by the end of this year. We bet on the former playing out.