FRBM or no FRBM, that is the question.

Sajjid Z Chinoy, Chief India Economist at JP Morgan, cautions against a fiscal stimulus in the coming budget. The reason for his caution is that demand is going to pick up sharply as new notes replace the old ones. The effect of a fiscal stimulus will take a few months to kick in by which time demand will be rising anyway, which will be inflationary. Demonetization has hurt small and medium industries, which operate on cash, so supply will not pick up with demand. The gap could be filled by increased imports from China, since the rupee has appreciated by 10% against the Chinese yuan. That would increase our trade and current account deficits. However, a big unknown is what effect Donald Trump's economic policies will have. If the US erects barriers to free trade the dollar will become stronger and foreign funds will sell out Indian stocks and bonds. As this money is repatriated to the US the rupee will fall even lower. At the same time, the consolidated deficit of the states has gone up from 2.2% of GDP in 2014 to 2.9% in 2015 and is expected to be 3.3% in 2016. "...to completely abandon fiscal consolidation next year -- as some in the market are advocating -- will dent credibility, trigger a tightening of financial conditions and, therefore, neither be efficacious nor optimal," writes Chinoy. Professor Sudipto Mundle comes to an exactly opposite conclusion from his analysis of the same data. The real GDP growth in the present financial year could be 6.8%, or even as low as 6.1%, but the budget cannot take this into account because it has been brought one month forward, which is 2 months before the end of the financial year on 31 March. Housing sales have fallen by 44% in 8 largest cities, automobile sales are the lowest in 16 years, revenues of small and medium industries have dropped 50% and jobs by 35% and demand for relief under the MGNREGA has increased by 20%. So, "....if the fiscal deficit target of 3.5% for 2016-17 is breached and the 3% FRBM target for 2017-18 is eased in the forthcoming budget, this would not be a bad thing," writes Mundle. FRBM stands for the Fiscal Responsibility and Budget Management Act which was passed in 2003 to stop irresponsible spending by governments. This was blatantly ignored by the Congress, resulting in double digit inflation, a collapse of the rupee and a fall in GDP growth. Since the FRBM Act was passed by the previous BJP government it would be ironic indeed if the present BJP government breaks it. India has benefited hugely from globalization, if not as much as China, while the US and the European Union have seen their share of the world GDP shrink. If the US puts up trade barriers our growth could fall sharply. No jobs and no money, it will be tough.