Global Economy

Budget 101: The complete guide to Nirmala Sitharaman's Budget on February 1


Come February 1, Finance minister Nirmala Sitharaman will have to confront a plethora of challenges.

On the one hand, there is growing clamour for increased government spending to pump prime a flagging economy. On the other, a big question mark hangs over how the FM will be able to mobilise resources at a time when the tax collections have taken a serious hit and divestment proceeds are nowhere near meeting the full year target of Rs 1.05 lakh crore.

With growth numbers set to hit an 11-year low this fiscal, the size and scale of the budgetary balancing act that awaits the FM are enormous.

THE CHALLENGES

Economic Growth: First advance estimates pegged GDP growth at 5 per cent. The number could well be below that if the economy fails to recover in the second half of FY20. Recently, the IMF slashed its growth outlook for India to 4.8 per cent in the current fiscal. Other rating agencies have also pegged India’s full-year growth between 4.5-5 per cent. The economy slipped for the sixth consecutive quarter to 4.5 per cent in the July-September period of the current fiscal.

Fiscal concerns: Fiscal deficit is set to breach the budgeted target of 3.3 per cent for the current fiscal on the back of muted revenue collection. Estimates have put the shortfall at Rs 2 trillion which could dent the government’s finances and shrink government spending. Concerns over increased borrowing have already scared the private sector which has made a dash for more market borrowings ahead of the budget.

Jobs: On Budget Day, India’s rising joblessness is likely to be on top of the Finance minister’s mind. Jobless growth has been a major concern for Modi govt. The FM could look to revive the SME sector which, if successful, could boost job creation significantly.

Exports: Global slowdown and trade tensions have taken a toll on India’s exports, an area that contributes majorly to the country’s economic growth. During April-November 2019-20, the country’s exports contracted by 2 per cent.

Revive manufacturing: Manufacturing, which the Modi government had promised to turn around at the start of its first term, has all but collapsed. According to the first advance estimates released by the government, manufacturing GVA growth is set to come in at just 2 per cent for the current fiscal.

Farm distress: The goal of doubling farmers’ income will be paramount for the FM at a time when farm distress is on the rise.

Construction: Another major worry for the Modi government is the slowdown in the construction sector. The NBFC crisis and reluctance on the part of banks to give loans has pushed this once-booming sector into the throes of a crisis. However, the announcement of a Rs 25,000-crore stress fund has eased some concerns.

THE HOPE

There is hope that on February 1, Nirmala Sitharaman may really present a game-changing Budget that changes the course of India’s economy. Amid continuously falling growth, periodic interventions by the FM have inspired hope that this time she will not hold back on bold reforms that have been kept waiting for long. The decision to cut corporate taxes has already shown that Modi govt doesn’t cringe from taking strong & effective steps to remedy an ailing economy.

Slashing Personal Income Tax: Following up on the corporate tax cut, speculations of a personal income tax cut also began to find traction. That, experts feel, will be one way to lift consumption as it will leave more money in the hands of the taxpayer. However, a counter view is that the move may not be as effective as is being touted, primarily because the extra money in the hands of the taxpayer will be saved rather than spent at a time when the economy is gripped by uncertainty.

Relief for investors: India Inc rejoiced when the FM announced the corporate tax cut. If she abolishes the capital gains tax (LTCG) and the Dividend Distribution Tax (DDT), it will be a bold statement by the Modi government that it really means business. The move will cheer up investors and give Modi government a pro-reform image, drawing more new investors.

Spending: Capital spending could well be the elixir that may heal a bruised economy. Higher capital spending will help crowd in private investment at a time when the investment rate has collapsed to just one per cent from 10 per cent in the previous fiscal. Clarity on how the government plans to raise finances for the National Infrastructure Pipeline (NIP) will instil faith in the Budget numbers.

Higher rural allocation: Flagship schemes like PM Kisan and the MGNREGS can be the instruments that change the narrative for rural areas. Higher allocations for these schemes will put more money in the hands of people in rural areas who drive the consumption economy — at least in the FMCG sector.

Interest deduction: The government can raise the Rs 2 lakh cap on interest deduction for home loans to revive the construction sector. This sector’s revival is critical as it tends to have a multiplier effect on the economy. More construction means more demand for cement and other construction material, which in turn means more job creation.

POSSIBLE REACTION

If the FM misfires on February 1, it will send the markets into a tailspin. The markets are currently riding high in anticipation of the finance minister taking forward the reform agenda. If the FM doesn’t live up to the expectations on the Budget Day, a big fall can be seen in the equities.





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