Will the Union Budget 2020 give the required boost to the economy?

Will the Union Budget 2020 give the required boost to the economy?
Just a few quarters back, the big debate in India was when the $5 trillion economy mark will be reached. That was around the time when India’s GDP had overtaken the UK and France to emerge as the fifth largest economy after the US, China, Japan and Germany. A lot of water has flown under the bridge in the last 6 months and $5 trillion economy now looks fairly distant. The immediate priority is to revive growth after quarterly GDP dipped to 5% and then to 4.5% in the quarters ended June and September 2019.  The December quarter GDP data is expected to be closer to 5% but the IMF full year estimate of 4.8% GDP growth looks bleak.

The mandate for Budget 2020 is quite clear. The finance minister must explore ways and means to give a big boost to the economy so that the trickle down impact can have a positive impact on the overall economy. Here are 8 things the Budget 2020 must address to revive economic growth and must happen in this budget.

8 steps to boost the economy via Budget 2020
There are no easy answers but Budget 2020 will have to dwell on 8 key issues to ensure that the quantum and quality of economic growth is revived.
  1. The first challenge to address is inflation. CPI inflation at 7.35% and double digit inflation in vegetables, fruits and pulses is just not sustainable. The budget must look at structural issues and also improve distribution of food to ensure that inflation is brought under control. Oil may not be in the FM’s control but food inflation is purely internal. High inflation and weak growth pushes the economy towards stagflation.
  2. The sooner the government addresses the challenge of high rates on small savings, the better it is. Paying steep rates on small savings and post office deposits is a disincentive for banks to cut rates. That means, transmission of rate cuts does not happen and monetary policy has limited impact. Budget 2020 must lower rates on small savings.
  3. Rural stress is evident from the weak rural demand and lower rural inflation. Farm incomes were supposed to double by 2022 but that looks quite ambitious. The farm incomes have not grown despite better prices and the need of the hour in this budget is to address issues of guaranteed employment not macro spending alone.
  4. It may appear challenging but the government must not allow fiscal deficit to spill more than the recommended leeway of 50 basis points. The government has given out Rs145,000cr as corporate tax cuts and will also have to spend on infrastructure. But, the answer is in relying more on public / private partnerships; not on state funding.
  5. Tax cuts may not look like an appropriate strategy at a time when the government is stretched for revenues. Ironically, that may be the answer. The government has built expectations in individuals after the corporate tax cuts and these tax cuts will ensure that spending is not negatively impacted. Giving tax sops on lower incomes would be a lot more effective due to higher propensity to consume. According to a BCG study, families with annual income levels of Rs5 lakhs to Rs20 lakhs contribute most to consumption. That is the segment to target with lower taxes.
  6. The government needs to bite the bullet on loss making PSUs. Sinking billions of dollars into PSU banks and the likes of Air India is bad economics and also a waste of precious resources. The Budget must have a time-bound plan with 3 options; revive, restructure or liquidate. That is the only way PSUs will stop being a drag on the macro economy.
  7. It is time to move towards energy security. The government did make a start with creating of oil reservoirs but that has hardly helped. Indian trade deficit and CAD is still too vulnerable to vagaries of oil price movements and that can only be managed with greater energy security. While expanding capacity is more of a medium term endeavour, the need of the hour is to create adequate reserves like the US and China.
  8. Last, but not the least, there is an urgent need to simplify the GST. The number of slabs need to be reduced and the compliance lowered for smaller entities. While the goal of bringing businesses under the organized fold is laudable, it must be simple.
The crux of the story is that if macro issues are not addressed in Budget 2020, India may lose the advantage vis-à-vis China in the Asian growth stakes.




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