The July budget speech, of the NDA-3, is the first of a five-year period. It is expected to establish the priorities and the work program of the coming five years. It takes place at a time when there is significant financial and economic stress. On about July 18, we will release our business cycle indicator for April-June 2019, which will show how current economic conditions are faring, but it is likely that these will be inferior to the value of +0.8% that was seen for Jan-Mar 2019.
The emphasis in the budget speech seems to be on welfare programs. There is a low accent on the economic reforms that are required to get back to a buoyant market economy. This might potentially reflect a political strategy, of using the eyeballs associated with the budget speech for a purely political objective. To the extent that the text of the budget speech is being used for the purpose of communication with voters, there is a possibility of more significant economic reforms coming out in the following months, as compared with what is shown in the budget speech.
There is an odd problem in the fiscal data; the numerical values for 2018-19 for revenues and expenditures, shown in the budget document, are substantially higher than those reported by the accountant of the government. Once the true values for 2018-19 are treated as the baseline, the budget for 2019-20 involves high growth rates for revenues and expenditures, which may not materialize.
In terms of fiscal soundness, an examination of the primary deficit and of the rate of growth of interest payments reveals a slight extent of fiscal stress. However, these numerical values need to be corrected to reflect the extent of off-balance sheet borrowing, which is not presently possible in the public domain.
Going by the numerical values in the budget, a significant expansion of the size of government is underway. This raises concerns about the adverse impact on the dynamism and energy of the private sector on GDP growth in the medium term.
The resolution of NBFCs has been placed into the RBI, alongside bank resolution which has been at the RBI. This is an unsatisfactory solution, given that the RBI has not been able to resolve banks well in the past. The RBI has been given greater regulatory powers. This is unlikely to result in improved financial regulation.
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