India looks to ease pain from cash crunch in budget

India’s government is expected to ramp up spending in its latest budget this week, seeking to ease the pain from a ban on high-value bank notes that slammed the brakes on the world’s fastest-growing major economy.
Ahead of a series of elections, Finance Minister Arun Jaitley will unveil a budget on Wednesday that analysts say will aim to offset the impact from the so-called demonetization program with stimulus measures.
“The overarching focus of the budget will somehow indicate a gain from pain mentality — how the pain of demonetization helped the government get some extra resources that it can now spread around,” said Rajeev Malik, senior economist at brokerage CLSA.
“It is going to be a budget that is meant to soothe the pain.”
Before Prime Minister Narendra Modi’s shock decision in November to pull all 500 and 1,000 rupee notes from circulation, the International Monetary Fund had forecast India’s economy would grow 7.6 percent in 2016, faster than any other major country.
But as authorities struggled to print replacement notes fast enough, causing consumer spending to plunge, the IMF knocked a percentage point off its forecast. The government’s prediction is 7.1 percent growth.
By painting demonetization as a blitz on corruption and cash-hoarding that will ultimately boost tax revenues, Modi has so far escaped a major backlash. While there were massive queues outside banks in the weeks afterwards, they have now subsided while limits on withdrawals have eased.
But voters in four states — including the key battlegrounds of Uttar Pradesh and Punjab — will have a chance to deliver their verdict when they begin going to the polls in multi-phase elections from Feb. 4.
Analysts say the polls are another reason why the government will be tempted to increase spending on health, education and a rural employment scheme.
There are also expectations of a support package for small and medium-sized businesses which have been particularly hard hit as they are heavily cash-dependent.
“We 100 percent expect a social focused budget,” said Malik as he considered the calculations for Modi half way through his five-year term.
“The focus in the first two-and-a-half years was on reviving growth... We are at the half way point now and there are some elections ahead so the shift is toward the social sector.”
Big business, hit by a drop in manufacturing and construction activity after the cash crunch, also wants help.
Pankaj Patel, president of the Federation of Indian Chambers of Commerce and Industry, said his members hoped for a cut in corporate tax from 30 percent to 25 percent and increased infrastructure spending.
“We are in an uncertain world and we need the support of the government,” said Patel .
Analysts are worried about how the government plans to fund that support.
“The central question before the government is whether a fresh round of fiscal stimulus is required to offset some of the ill effects of currency delegalization,” Devendra Pant, chief economist at India Ratings & Research, said in a recent note.
“The fiscal room for stepping up expenditure has to either come from higher revenue collection or higher fiscal deficit. With growth expected to fall... the government is clearly staring at lower tax collection.”
One area that offers some wriggle room is the budget deficit target.
The current deficit is 3.5 percent of GDP and the government had said it would reduce that to three percent for the fiscal year starting in April.
But in the face of lower tax earnings and a probable stimulus budget, analysts now expect a revised target of around 3.3 percent.
In a recent note, Morgan Stanley said “the pace of fiscal consolidation will be slower than expected” as the government “will find it difficult to cut back spending aggressively because the economy is recovering” from demonetization.
Nevertheless, analysts say investors will be unimpressed by any dialing back of fiscal consolidation plans.
“Foreign investors will be cautious about this shift in political orientation,” said Malik. 
“It does not change India’s structural story, but it takes away a bit of the shine in terms of growth expectations.”

Source : Arab News