Union Budget 2020 comes in the midst of difficult economic conditions. The inflation has touched a high of 7.35% while the GDP growth is expected to touch a multi-year low of 4.8% as per IMF estimates. Clearly, the finance minister needs to push growth without letting inflation go off the hook. While large scale government spending is a must, the budget cannot let the fiscal deficit spill too much. The broad theme of Budget 2020 may be calibrated growth but there are four important underlying themes of this Union Budget. Theme 1: Put more money in the hands of the people Any attempt at propping GDP growth has to come begin with putting more money in the hands of the people. The easiest and most effective way is to tweak direct taxes. There is a constraint here. The government is expected to fall short of revenue targets on direct and indirect taxes. Despite that risk, the Union Budget 2020 will have to take the initiative to reduce the burden. Here is what the budget could do. The basic exemption limit can be simplified and set at Rs.5 lakh instead of going through convoluted rebates. According to a study by the Boston Consulting Group (BCG), the persons in the income group of Rs.8 lakhs to Rs.20 lakhs contribute the maximum to consumption demand. What the budget can do is to reduce the tax rate to 5% up to Rs.8 lakhs and reduce the tax rate by 5% up to Rs.20 lakhs to create more consumption potential. Another way would be to trigger a virtuous investment cycle by expanding the list and limits of Section 80C and Section 24 of the Income Tax Act. Theme 2: Give a big push to rural demand If you look at the top line growth of any of the FMCG or auto companies, the big demand compression is coming from rural areas. Clearly, the higher MSP assured by the previous budgets has done little to improve the income levels of farmers. Doubling farmer incomes by 2020 remains a distant goal for now. The Budget must focus on minimum employment guarantee in rural areas and expand the MNREGA in a much bigger way. Some form of helicopter money in rural areas also cannot be ruled out. Above all, the government must not relent on its rural infrastructure thrust as it has a multiplier effect on rural growth and rural incomes. Theme 3: Take steps to keep inflation under control The big economic risk, that people at large are facing, is the risk of stagflation. What exactly is stagflation? It is the combination of high inflation and tepid growth, which is exactly what India is seeing at this point of time. That is exactly what the budget needs to address urgently. Weak growth is unfair and if it is supplemented by high inflation, it only makes matters worse. There are two approaches. The biggest trigger for high inflation has been food inflation. Clearly, vegetables, fruits and pulses inflation at above 20% is not sustainable. The first approach must be to have a clear supply management policy on auto mode such that inflation does not become sticky. Secondly, the government must look to cut GST rates for the time being to bring prices under control. At the same time, the structural issue like post-harvest infrastructure and refrigerated movement of perishables must be addressed on priority. These are likely to be key aspects of this budget. Theme 4: Cannot let fiscal deficit go out of control Despite the macho statements on growth and the need to expand the fiscal deficit, if required, the government has its own constraints. Fiscal deficit at 3.3% looks unrealistic considering the corporate tax exemption bill and the shortfall in direct and indirect tax revenues. That is where the dilemma comes in. The government cannot expand fiscal deficit more than 30-40 bps due to two reasons. Firstly, if the fiscal deficit goes beyond the 50 bps leeway offered by the NK Singh Committee, rating agencies are likely to look at India’s sovereign debt with scepticism. Secondly, higher fiscal deficit will push up the bond yields and lead to higher cost of funds for corporates. That is not conducive to GDP growth. Nirmala Seetharaman surely has a tightrope to walk on. Demand has to be spurred without borrowing too much and incomes have to be spurred without impacting the coffers. That is a tough theme to live by and will call for innovation and out-of-the-box thinking by the FM! Union Budget 2020 comes in the midst of difficult economic conditions. The inflation has touched a high of 7.35% while the GDP growth is expected to touch a multi-year low of 4.8% as per IMF estimates. Clearly, the finance minister needs to push growth without letting inflation go off the hook. While large scale government spending is a must, the budget cannot let the fiscal deficit spill too much. The broad theme of Budget 2020 may be calibrated growth but there are four important underlying themes of this Union Budget.
Share your Name and Mobile Number with us and get started