Why The World Matters


Arun Jaitley’s budget alone is unlikely to get the Indian economy moving into higher growth. International factors are critical including how China performs, continued growth in the US and Europe and the dangers of Britain’s exit from the European Union BY ALAM SRINIVAS

Budget 2016 can provide one of the most crucial triggers for the Indian economy. It is now firmly established that India hasn’t got into the high-growth trajectory. In fact, there are chances that, like China, the economy may slip rather than take off.

Thus, this is a Make-or-Brake, if not Make-or-Break, Budget for Finance Minister Arun Jaitley. The crux of the problem is that the economy is in an ‘Iffy’ zone; no one is sure whether it is on the right or wrong track. In effect, it a case of glass that’s half filled – the optimists and pessimists differ on what it implies.

Despite the crisis in China, Japan and European Union, Prime Minister Narendra Modi said that India would not be impacted by them. Jaitley maintained that the era of higher growth was around the corner, and there was resurgence in manufacturing. The government claimed that huge investments were promised at the Make in India event, organized in Mumbai. Inflation was down to its lowest levels in recent times. A few experts felt that the policies announced over the past 21 months would yield effective results in the near future.

However, exports are down for the 14th month in a row. The country is staring at a second consecutive drought year. Core sectors aren’t growing at the rates that they should. Retail inflation is still high. Stock markets have crashed to new lows. Rupee has weakened against the dollar, and other currencies. Some business persons contend that there isn’t much ease in doing business after Modi took over. The investments that were promised will only impact the economy over the next 2-3 years. Will it be too late for Modi and his A-Team to show their leadership talents?

Including Budget 2016, there will be five crucial triggers over the next 10 months, which will determine the future course of the economy. The first is, obviously, the Budget, and the forthcoming Parliament session. Second is whether China goes through a soft or hard landing. Third is the prediction that the huge fall in global crude oil, and other commodities, prices could reverse. Fourth is whether the Japanese central bank’s policy to resort to negative interest rate will be emulated by other nations. Finally, one has to see if the attempts to invite Britain to the European Union will succeed or not in June 2016. All these will influence India.


By the time you will read this piece, Jaitley would have announced his third Budget. However, it is not the big-ticket policies that one should look for. The three issues that you should seek would include the following questions:

If China goes down, it will take developed and developing nations along with her. The latter will include India. The country’s exports, which are in the red zone for over a year, will suffer further

Did the finance minister do enough to boost government revenues, control its expenditure, and rein in the fiscal deficit? If the deficit goes haywire, global credit ratings could downgrade India, and that could unleash havoc on the Indian economy. Higher deficit could ring in another era of high inflation, which would force the central bank to hike interest rates that in turn could squeeze future investments.

Did Jaitley do enough to make taxes simpler and stable? The finance minister needs to implement most of the recommendations of the Parthasarathi Shome Committee in a bid to help the business community and, more importantly, the middle-class taxpayers. He has talked about tax reforms several times in the run-up to the Budget.

Did Budget 2016 do more to accelerate investments in the immediate future? Although private investors have promised to pump in huge sums, it will take time before they translate into reality. So, the only option before Jaitley, and he has said it before, would be to hike public spending. But it won’t be easy for several reasons.

Apart from the Budget, the next Parliament session is crucial to send the right signals to the investors, and improve investment sentiments. Several BJP politicians have claimed that the government has clicked a deal with the opposition parties on Goods and Services Tax (GST). Prime Minister Narendra Modi met the leaders from several parties in a bid to seek their support on GST in the Rajya Sabha, where the NDA-2 doesn’t have the requisite numbers. Passing the GST Act will be the feather in the economic reforms’ cap for this government.

Given the furor over the arrest of the students of the Jawaharlal Nehru University, death of a Dalit student in Hyderabad, and the nationwide protest among the youth across the country, both the Congress and Left Parties may disrupt Parliament in the next session, as was the case with the earlier ones. This will imply that the GST may be put into the cold storage again. If this happens, it will further undermine the confidence that Modi and Jaitley enjoy among the business community. A lackluster Budget 2016 and dampener of a session will be a disaster.


There are several question marks on how the Chinese economy will fare over the next six months. Despite the strict action taken by the Red Dragon to clean up its banking sector, and bring its currency down to realistic levels, its growth has stuttered and suffered. Economists are unsure whether China will witness a soft or hard landing. In case of the former, there will be lesser impact on the global economy, including India. But an economic thud in China can quake international manufacturing and trade. This will impact the investment scenario too.

Instead of the arrogance shown by New Delhi in the past – going by the claims that China’s misfortune will be India’s advantage – they should prepare for the worst. The truth is that if China goes down, it will take developed and developing nations along with her. The latter will include India. The country’s exports, which are in the red zone for over a year, will suffer further. This can negatively impact the Current Account Deficit, or the difference between India’s earnings and expenditure in foreign exchange. The reason: China will drive down the global economy.

In the past we have witnessed that whatever may be the disconnect between India and world economy, there is always a negative reaction in the former if a large nation in the latter undergoes a crisis. This happened during the Russian crisis after the break-up of the Soviet Union, East Asian Crisis during the late 1990s, and even Financial Crisis of 2008. Most experts felt that that Indian banking sector was immune to the 2008 crises in the US, Europe and Japan. The truth is that it wasn’t – the impact was postponed. While there were no mortgage-related asset busts in India, as was the case elsewhere, the spiraling down of the world economy led to a huge hike in the bad loans of state-owned banks. This is reflected in the ongoing banking crisis in India.


One of the benefits that India has derived since Modi took charge was due to slump in the global prices of crude oil and other commodities. A Great Depression (1930s) kind of a crisis internationally helped India to save over Rs. 250,000 crore in her import bill. This kept the Current Account Deficit under check, despite continuous fall in exports, but also helped Jaitley to manage government expenditures and fiscal deficit, despite a not-too-impressive increase in revenues.

To put it simply, thanks to lower-than-expected growth, government revenues didn’t grow adequately in 2015-16. In addition, the topsy-turvy stock markets restricted Jaitley’s attempts to shore up revenues through other means like disinvestment. This would have forced the government to drastically curtail its expenses, and slash the budgets of crucial social sectors, or even infrastructure. It didn’t happen because of the savings due to a fall in international commodities’ prices. The money saved was used to spend more, and still keep the deficit in check.

It may not repeat in 2016-17. Experts feel that crude oil prices may go up given the situation in the Middle East, and other regions. Even if it remains the same, India’s import bill is likely to remain the same. In the case of other commodities, the situation is the same despite the problems with China, which is one of the largest importers of several products. The reason: the US and parts of Europe have begun to show positive growth signals. So, what China will not import may be made up by higher purchases by other developed nations next year.

Budget 2016 is only the first tough test for Jaitley. Till the end of the calendar year, he will face several hurdles in his drive to get the economy to take off to newer heights

So, if growth doesn’t happen in India, the finance minister will need to either let the fiscal deficit go haywire, or reduce expenses. Both can impact the economy adversely. Higher deficit can allow the inflation octopus to spread its dark tentacles again; this will disrupt growth. Lower expenses on social and infrastructure sectors can stunt growth. In fact, the only panacea for the economy is higher investments, and in the immediate term. In fact, Jaitley said he would hike public spending to make up for the lack of interest among private investors.


Recently, the Bank of Japan (BoJ), the country’s central bank, heralded a period of negative interest rate. It meant that those who wish to save their money in the banks will have to pay the banks for it, not the other way around that is natural and logical. The reason: in a deflationary economy like Japan, where prices of commodities are going down and the banks are extremely wary to lend, this is a way to force the latter to open their fingers to spur investments. This is one of the few ways to achieve growth and pull an economy out of the deflationary spiral.

Although it sounds great in theory, it can have negative consequences. For example, both individuals and companies may decide to sit on cash, and hide it under their mattresses and in their vaults, rather than save it with the banks. This will worsen the situation as the banks will then have lesser money to lend, and will be more wary to give loans to companies. In addition, it may lead a global competition between central banks to outdo each other. They would resort to similar tactics of negative interest, and ask savers to pay more. This can shatter the stability of the global economy, and pull down even the ones that are doing reasonably well.

However, this is not the first time that a central bank has used this rare monetary instrument. In the recent past, several European economies have experimented with negative interest with mixed results. In cases, where the focus was singular – like align its currency with the Euro – it worked. In other cases, where there were multiple objectives, it failed. So, one doesn’t really know how Japan will pan out in the near future, and what will be its impact on the global economy. Despite all the claims to the counter, India will be sucked into this negative zone.


In February 2016, the European Union (EU) reached a deal with Britain in order to woo the latter to remain with the former. Britain has announced that it will hold a referendum in a few months to decide whether it should do so or not. The results of this election will be critical for the immediate future of the EU. If Britain exits the EU, it will plummet Europe into further crisis. Already, after the Greece crisis, there are uncertainties about the economic future of the EU. If Britain says yes, it will lift the European sentiments and imply positive implications for the world.

Jaitley maintained that the era of higher growth was around the corner, and there was resurgence in manufacturing. The government claimed that huge investments were promised at the Make in India event

According to newspaper reports, the question has divided even the ruling Conservative Party, headed by Prime Minister David Cameron. While most of his Cabinet colleagues wish to remain with the Union, there are several who have opposed their leader’s stance. There is a growing campaign in the country to break free of the EU’s bureaucracy, and exit, or Brexit. The opponents contend that the EU was “in danger of getting out of proper democratic control”. On the positive side, no country has ever left the EU; there are many waiting in the wings to join it.

Budget 2016 is only the first tough test for Jaitley. Till the end of the calendar year, he will face several hurdles in his drive to get the economy to take off to newer heights. Each one of the above triggers can derail his aims; each one chip away at Modi’s political ambitions. Therefore, it may better for Modi, Jaitley & Co to focus on these issues, and rein in the elements that are excited to debate on intolerance, nationalism, and flag-hoisting in central universities.


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