The upcoming budget will focus on raising investment and consumption levels to bring the domestic economy back to track. While doing so the government may have to reconsider its fiscal consolidation roadmap, said a report by Care Ratings.
“The general sentiment surrounding the Union Budget 2020-21 is that the government would announce a series of measures that would help kick start the revival of the domestic economy. Growth has slumped to an 11 year low in the current financial year and is projected to be 5% by the RBI (5.2% is our forecast)” said care ratings.
“We believe that the Budget would primarily be directed towards raising investment and consumption levels which involves substantial employment generation. This could largely be through the infrastructure development route entailing higher CAPEX. Higher allocations towards capital(infrastructure) spending and the resultant employment opportunities generated would, in turn, lead to higher consumption. There could be some limited measures announced on the personal tax front to provide some support for consumption too.”
“We believe that the Budget would primarily be directed towards raising investment and consumption levels which involves substantial employment generation. This could largely be through the infrastructure development route entailing higher CAPEX. Higher allocations towards capital(infrastructure) spending and the resultant employment opportunities generated would, in turn, lead to higher consumption. There could be some limited measures announced on the personal tax front to provide some support for consumption too ” CARE Ratings
“However, given that the government has faced several challenges on the revenue side when trying to balance the budget in FY20, we believe there is scope for deciding on a modicum of flexibility in the fiscal policy” it added.
In order to stimulate economic growth, the government could incur higher expenditure in 2020-21 given that domestic economic growth in recent times has been largely led by government/public spending amid subdued private consumption and investment. This would require the government to reconsider the fiscal consolidation roadmap of bringing down the fiscal deficit to 3% of GDP by 2020-21. The intended fiscal consolidation plan would have to be pushed forward to later years when domestic economic growth picks up. With revenue collections being lower than expected due to weakness in economic growth, the central government is most likely to breach the gross fiscal deficit target of 3.3% of GDP for 2019-20 by 0.6 -0.8% which would essentially take the revised fiscal deficit to 3.9-4.1% of GDP for the year.
If the government is likely to adopt a flexible fiscal policy for 2020-21 and increase the fiscal deficit by 0.5%, then assuming a nominal GDP growth of 10% for the year (FY21 projection to be around Rs 225 lakh cr) the quantum of incremental fiscal deficit would be higher by around Rs 1.10 lakh crore which can be directed towards CAPEX. In case the fiscal deficit is increased by 1% above the currently stated target, the quantum of increase in fiscal deficit would be Rs. 2.2 lakh crores. This would be an interesting call to be taken by the government.
