26-08-2017, 04:57 PM
The Union Budget 2017-18 is unique in many ways. It will be the first budget after the demonetization without precedent and will be presented the first business day of February. Assembly elections scheduled in five states also give the budget a political angle, as the searches that will be announced could have an impact on election results. In general, the budget will consider the measures that the Government will take to save the economy from the damages caused by demonetization.
The Government has put forward the argument that demonetization did not have a negative impact on the economy by projecting an increase in indirect revenue growth. There is a paradox in this argument. On the one hand, the Government argues that all the negative impacts demonetization has had on the economy are temporary phenomena. On the other hand, it is planning critical measures to stimulate the economy.
It is an accepted fact that demonetization has held back the fastest growing economy in the world. It has negatively affected the feelings of consumers and investors in the country. Consumers and investors have become very pessimistic, and all see the next budget as a tool to revive the economy.
But will the expansionary fiscal policy help the country overcome the crisis or lead the country to another serious crisis? What you have to look at is how the government will stimulate the economy, reducing taxes or increasing expenses.
Reducing taxes raises household disposable income. The increase in disposable income can have a positive overall impact on the economy. If the Government is going to increase expenses, it will be a challenge to finance the additional costs. An increase in spending will widen the fiscal deficit gap, making it difficult for the government to achieve its fiscal deficit target. It is above all in this context that the Government is asked to set a margin for the fiscal deficit, such as setting inflation targets, rather than sticking to a number. Fiscal discipline is fundamental to the economy and any deviation from it can cause serious damage to the economy.
The huge deposits in the bank, the later demonetization, lowered interest rates and credit became cheaper. It was expected that cheaper credit facilities would attract private investors to take advantage of credit facilities, which in turn would stimulate the investment cycle in the country. But if a loose monetary policy is accompanied by an expansive fiscal policy, the result will be different.
Consider two main scenarios. The government can print more money to cope with its increased spending. The increase in the money supply in the economy can lead to inflation, which will reduce the real value of public spending. Ultimately, the common man will suffer from spiralling inflation rates. For example, if we look at the trend of the fiscal deficit in India, we can see that the country was moving towards fiscal consolidation until 2007-08. From 2008-09 on wards, he deviated from this path. The September 2008 Lehman crisis is often cited as the reason behind the expansive fiscal policy, as it was necessary to restore the economy of the scars caused by the global financial crisis. But 2008-09 was also a year prior to the election and many of the higher expenditures occurred even before the crisis in the form of wage increases, increased allocation for NREGA and subsidy increases. Thus, the fiscal deficit target for 2008-2009, estimated at 2.5 percent of GDP, ended at 6.1 percent of GDP. The successive governments continued with the expansionary fiscal policy even after the crisis, which caused high rates of inflation and a tightening of the monetary policy. The result was a slowdown in investment and GDP growth. Figure 1 shows the movement of the fiscal deficit and inflation rates in India during the last 10 years.
The Government has put forward the argument that demonetization did not have a negative impact on the economy by projecting an increase in indirect revenue growth. There is a paradox in this argument. On the one hand, the Government argues that all the negative impacts demonetization has had on the economy are temporary phenomena. On the other hand, it is planning critical measures to stimulate the economy.
It is an accepted fact that demonetization has held back the fastest growing economy in the world. It has negatively affected the feelings of consumers and investors in the country. Consumers and investors have become very pessimistic, and all see the next budget as a tool to revive the economy.
But will the expansionary fiscal policy help the country overcome the crisis or lead the country to another serious crisis? What you have to look at is how the government will stimulate the economy, reducing taxes or increasing expenses.
Reducing taxes raises household disposable income. The increase in disposable income can have a positive overall impact on the economy. If the Government is going to increase expenses, it will be a challenge to finance the additional costs. An increase in spending will widen the fiscal deficit gap, making it difficult for the government to achieve its fiscal deficit target. It is above all in this context that the Government is asked to set a margin for the fiscal deficit, such as setting inflation targets, rather than sticking to a number. Fiscal discipline is fundamental to the economy and any deviation from it can cause serious damage to the economy.
The huge deposits in the bank, the later demonetization, lowered interest rates and credit became cheaper. It was expected that cheaper credit facilities would attract private investors to take advantage of credit facilities, which in turn would stimulate the investment cycle in the country. But if a loose monetary policy is accompanied by an expansive fiscal policy, the result will be different.
Consider two main scenarios. The government can print more money to cope with its increased spending. The increase in the money supply in the economy can lead to inflation, which will reduce the real value of public spending. Ultimately, the common man will suffer from spiralling inflation rates. For example, if we look at the trend of the fiscal deficit in India, we can see that the country was moving towards fiscal consolidation until 2007-08. From 2008-09 on wards, he deviated from this path. The September 2008 Lehman crisis is often cited as the reason behind the expansive fiscal policy, as it was necessary to restore the economy of the scars caused by the global financial crisis. But 2008-09 was also a year prior to the election and many of the higher expenditures occurred even before the crisis in the form of wage increases, increased allocation for NREGA and subsidy increases. Thus, the fiscal deficit target for 2008-2009, estimated at 2.5 percent of GDP, ended at 6.1 percent of GDP. The successive governments continued with the expansionary fiscal policy even after the crisis, which caused high rates of inflation and a tightening of the monetary policy. The result was a slowdown in investment and GDP growth. Figure 1 shows the movement of the fiscal deficit and inflation rates in India during the last 10 years.