Budget 2020: Infrastructure requires immediate funding to rejuvenate itself January 2020
“Extraordinary circumstances call for extraordinary measures” – this seems to be the only thought on Finance Minister Nirmala Sitharaman’s mind. And, the reason is quite simple: With the GDP at a decade low rate, job creation at its lowest levels in the last five decades and India Inc struggling despite all participation from their end – this undoubtedly is an extraordinary scenario and does call for extraordinary measures on the government’s part. With inflation taking its head out again and little room left for any further policy rate cut, it is high time that the NDA government (re-elected with better numbers in the second term) is required to take newer reforms at a rapid pace. With scare resources and widening twin deficit issues – it is expected to be a herculean task for the UPA Government. Add to that, the dream of becoming a $5 trillion economy (let’s not put the number of years left); no wonder, pressure is mounting on the UPA Government.
With just a few days to go for presenting the Union Budget for FY2020-21, every industry body has already presented its wishlist to the government. With job creating being a prime issue among others, certainly, much is expected from the common man as well.
Certainly, it will be a tight rope walk for the government, which has to maintain a fine balance between the industry wishlist, populist demand from the common man and all of this along with achieving their own target of fiscal prudence. While fulfilling all the demands will be tough, the government definitely needs to be more pragmatic!
All in all, Budget 2020 is expected to be a fine balance between counter-cyclical policy support and fiscal prudence.
Here’s a look at a few macro factors related to the Union Budget FY2020-21.
Ever since it has come to power, the NDA Government has been focusing on ‘Fiscal Prudence’. With support from crude oil prices and some import curbs on gold, the current account deficit (CAD) issue was managed. However, a contrast to expectations, the collection of taxes and a slower divestment process has put some pressure on fiscal deficit targets. Rather, despite the support coming from RBI, the targets of lowering the fiscal deficit seem to be a difficult task. To put the figures in perspective, most on the street pegs the fiscal deficit for FY20 at 3.8 percent of GDP and for FY21 at 3.6 percent of GDP.
As far as the tax rates are concerned, with a corporate tax cut in the bag, the time seems ripe for a cut in personal income taxes to boost consumption. Rather CW opines that a personal tax rate cut should have been the right way to start with. Nevertheless, with a significant revenue shortfall, we believe that the scope for a tax cut is limited.
Apart from this, with significant stress among MSMEs, one can expect some sops for the MSME sector. CW opines that the budget may include directed flow of credit through government agencies, which may be at concessional interest rates. Amid rising capital cost, this should come as a breather for MSMEs.
While there is some slippage in divestment targets in FY20 on procedural delays, the government must remain focussed on the divestment agenda for FY21. Further, one needs to understand that there would be headwinds to non-tax revenue in FY21. Reasons being – RBI dividend would be lower (the government has received Rs 580 billion extra in RBI dividend in FY20), while the moratorium on telecom license fees will also lower revenue.
We must understand that fiscal slippage is prescribed over creative accounting and expenditure cuts. Historically, fiscal expansion in times of growth slowdown is positive for the economy and equity markets. Fiscal and monetary coordination also has a wider and faster impact on the economy.