Budget 2020: Will govt be brave enough to walk the extra mile, turn tables and spark a rebound in economic growth?

The current economic situation is no less than a nightmare for policymakers, who have been trying to turn things around with policy actions and are now fast running out of policy ammunition. The Indian economy is going through a sustained slowdown with growth slowing for over five quarters now, marking this the longest slowdown in the country since liberalisation. This is also the bleakest growth phase for India after the 2008 financial meltdown in the US. To make matters worse, inflation has gone up beyond the Reserve Bank of India's (RBI) long-term target range on the back of rising food prices. The fiscal deficit has already crossed 114.8 percent of the budgeted target rate within the first eight months of FY2019-20, putting more pressure on government finances.

The government sprang into action with several announcements post the interim Budget, such as extending support to the auto and real estate sectors, decreasing corporate tax rates, and liberalization of FDI norms for select sectors, among others, to restore demand and supply in the economy and put the economy back on the growth trajectory. At the same time, measures such as recapitalisation of banks and the amendment to India’s Insolvency and Bankruptcy Code were undertaken to resolve liquidity and solvency and boost credit growth. In addition, the government unveiled a mega Rs 102 lakh crore national infrastructure pipeline for the next five years. As the infrastructure sector has strong linkages with the rest of the economy, the significant investment may not only stimulate growth but also create jobs and enhance economic efficiency and productivity.

Representational image. PTI

The government’s measures have been complemented with prudent monetary policies by the central bank. The RBI cut  five consecutive times by 135 basis points in 2019 bringing it to their lowest since 2010. In addition, the RBI has maintained its accommodative monetary policy stance and signaled that the stance would remain unchanged “as long as it is necessary to revive growth.”

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Despite these measures, the economy is not showing signs of a sustainable rebound. A few leading indicators such as industrial production, auto sector sales, and tax collections suggest some traction in a few pockets of the economy, but there is no sign of sustainability. Clearly, there is more policy action needed to get the economy out of the trap and to give it the desired momentum.

That said, high inflation and a rising fiscal deficit is fast closing the doors for further policy stimulus. The MPC kept the key policy rate unchanged at 5.1 percent with an accommodative stance in its December meeting citing concerns over rising prices. With inflation touching 7.35 percent in December, the RBI may not be willing to ease policy any further.

Everyone is pinning their hope on the government’s action in the upcoming Budget. The government will have to take a big leap with several immediate as well as long-term policy actions to address growth. As a priority, the government has to take measures to control the stagflationary trends before it spins out of control. Through better coordination in supplying vegetables from farmers to final consumers and better management of inventories, the price rise has to be checked. Providing credit support to farmers and transferring income in the hands of rural consumers will help spur rural demand. This should be followed by incentives to labour-intensive industries such as construction, housing, road-building and irrigation, which can create jobs and income and therefore, triggering consumption and investment. Additionally, the government has to incur expansionary fiscal policy by raising capital expenditure that leads to asset creation (and reducing revenue expenditure).

While these measures will increase the deficit far beyond the Budget target, extreme times call for extreme measures. Several economies have done this in the past. For instance, Germany—a strong proponent of a balanced budget—incurred a strong fiscal deficit during 2008-09 to help the economy come out of the crisis. The US fiscal deficit shot up to 8.1 percent during this crisis. The government has to prioritise growth. Once the momentum picks up, the government can take action to consolidate its expenses.

Among the long-term measures, the government should continue with the earlier reform measures and programmes and strengthen the institutional structure to improve efficiency and transparency. By addressing structural logjams related to environmental and other regulatory clearances, complicated tax processes, labour challenges, land acquisitions, etc., the government can reduce project costs and delay in the implementation of massive programmes. Tackling bottlenecks such as these will improve the ease-of-doing business in India, reduce the stress on the financial sector, and better ease of living.

Among other measures, rationalising the GST rates, simplifying the GST structure by bringing amendments, and ensuring a healthy flow of input tax credit will go a long way in improving taxpayers’ compliance and competitiveness, and thereby, government’s revenues.

Everyone is waiting for the Budget with bated breath and high expectations that the government, which had a spectacular win in the previous elections, will go the extra mile, turn the table, and spark a rebound in economic growth.

(The writer is economist, Deloitte India)

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