Budget 2017-18 unlikely to spur growth

Fiscal deficit also higher than stated and recommended

by Mahesh Vyas

CMIE had projected a substantial fall in the GDP growth following the demonetisation shock. The union budget is an important policy intervention of the government which, theoretically, could have a significant impact on growth. Thus, a substantial change from the norm could merit a change in our forecast. Here, we examine if the budget proposals imply any shift from the norm which warrant a change in the forecasts.

The Indian economy suffers low consumption expenditure demand and a falling investment ratio. We also face an adverse global economic environment. But, this is almost a constant since 2008 and there isn’t much we can do about that. A short term solution to India’s sluggish growth prospects would be to spur greater consumer spending and the short-to-medium term solution would be to facilitate accelerated investments.

Lack of consumption demand is the greatest hurdle in accelerating growth. This is reflected in the very low capacity utilisation reported by the OBICUS RBI survey. Capacity utilisation in the June 2016 quarter was only 72.9 per cent compared to peak levels of 83.2 per cent in the March 2011 quarter. Demonetisation has made a bad situation on consumer demand front only worse. The budget does nothing to provide even a temporary succour.

The options available to the government to spur consumption expenditure included increased allocation to jobs-generating schemes such as MGNREGA or by introducing the much-talked about targeted basic income or even enhanced allocations to food subsidies and other welfare schemes. The government, in its wisdom, did none of this.

Overall government expenditure is budgeted to grow by only 6.6 per cent. This is the lowest growth in a decade. This is the best summary statistic to indicate that the budget makes no contribution towards spurring economic growth in the coming year.

However, households have been given a Rs.128 billion income tax break. This bonanza is likely to be saved by households rather than spent. Consumer sentiments are not high currently to motivate them to spend the additional net income they see for themselves.

Hence, no change is warranted in our forecast of a 6.2 per cent increase in private final consumption expenditure in 2017-18 or the 3.5 per cent and 4.5 per cent increase projected for the last two quarters of the current fiscal year, respectively.

The union budget does not contain allocations that indicate any plan to invest into capacity creation or motivate private sector to increase investments.

Capital expenses of the government are projected to grow by about 10 per cent, which is lower than the recent average of about 12 per cent per annum. Investments by public sector enterprises are projected to decline.

As a result of the above, we do not have a reason to change our real GDP growth forecast of 6 per cent for 2016-17 and 6.1 per cent for 2017-18.

As per the FRBM target, the government was supposed to reduce its fiscal deficit to three per cent of GDP by 2017-18. The union budget has neither managed to stick to this target nor has it done enough to fuel economic growth.

CMIE STATISTICS
Unemployment Rate
Per cent
4.5 -0.1
Consumer Sentiments Index
Base September-December 2015
96.5 +0.2
Consumer Expectations Index
Base September-December 2015
95.7 0.0
Current Economic Conditions Index
Base September-December 2015
97.8 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Dec 16 Mar 17 Jun 17 Sep 17
New projects 2.33 3.84 2.07 1.03
Completed projects 1.01 1.94 1.16 1.00
Stalled projects 1.14 0.73 2.67 0.67
Revived projects 0.18 0.67 0.30 0.29
Implementation stalled projects 0.83 0.33 0.68 0.62
Updated on: 16 Dec 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Dec 16 Mar 17 Jun 17 Sep 17
All listed Companies
 Income 6.2 10.2 9.8 8.2
 Expenses 6.3 11.9 10.0 9.5
 Net profit 40.2 16.0 -19.6 -18.1
 PAT margin (%) 6.0 6.0 5.3 5.6
 Count of Cos. 4,509 4,444 4,325 4,177
Non-financial Companies
 Income 5.9 11.8 10.4 8.1
 Expenses 7.2 15.6 10.6 8.1
 Net profit 24.5 -2.3 -25.0 -5.4
 PAT margin (%) 6.2 6.2 5.2 6.4
 Net fixed assets 6.9 9.3
 Current assets 2.7 79.6
 Current liabilities 8.8 10.0
 Borrowings 4.8 10.6
 Reserves & surplus 6.3 5.3
 Count of Cos. 3,484 3,440 3,358 3,245
Numbers are net of P&E
Updated on: 16 Dec 2017 8:20PM
Annual Financials of All Companies
(% change) FY14 FY15 FY16 FY17
All Companies
 Income 10.0 5.2 1.1 6.7
 Expenses 9.9 5.2 1.2 6.9
 Net profit -2.3 1.4 -13.1 20.6
 PAT margin (%) 3.2 3.2 2.9 6.4
 Assets 12.3 9.4 9.7 8.6
 Net worth 9.6 8.7 10.6 7.9
 RONW (%) 6.2 6.1 5.1 9.2
 Count of Cos. 24,045 23,818 20,791 4,756
Non-financial Companies
 Income 9.7 4.3 0.1 6.7
 Expenses 9.3 4.5 -0.6 7.5
 Net profit -2.7 -5.8 11.6 14.6
 PAT margin (%) 2.2 2.1 2.6 6.3
 Net fixed assets 11.6 13.3 15.5 7.3
 Net worth 8.1 7.1 11.0 6.3
 RONW (%) 5.1 4.9 5.4 10.3
 Debt / Equity (times) 1.1 1.1 1.1 0.7
 Interest cover (times) 2.0 1.9 2.0 3.4
 Net working capital cycle (days) 69 67 66 49
 Count of Cos. 19,288 19,270 17,281 3,624
Numbers are net of P&E
Updated on: 04 Dec 2017 11:59AM

Data added for HPI at Assessment prices and HPI at Market prices