What the Finance Minister must Budget for

Jagadish Shettigar/Pooja Misra | Updated on January 18, 2021

Forward looking | All eyes on the Ministers   -  PTI

The effort must be to boost people’s purchasing power to kick-start the revival of a pandemic-hammered economy

The Indian economy was facing a slowdown even before the outbreak of Covid-19. The GDP growth numbers for 2019-20 were at an 11-year low of 4.2 per cent. The virus resulted in bruising the economy badly, leading to negative growth, loss of income, lower consumption demand and weaker consumer sentiment.

With the economy showing signs of recovery in the second quarter of FY21, in December 2020, the Reserve Bank of India revised growth projections for real GDP in 2020-21 to (-7.5 per cent) from (-9.5 per cent) in October. Thus, in the Budget 2021-22 the government should make an all-out effort to win the confidence of people. Also, there are some issues that the Finance Minister cannot afford to ignore.

The need of the hour is to kickstart consumption demand that can be dealt with through fiscal policy measures such as personal income tax, GST, welfare measures and hike in overall government expenditure. Measures such as putting more money in the hands of lower income-tax payers by exempting up to ₹10 lakh; removing the confusion created through half-hearted measures such as the option between old and new slabs; removal of tax on perks provided by companies, especially, education allowance, leave travel allowance, or accommodation provided by employers can be looked at. The proposed redevelopment project of the Central Vista can also generate direct and indirect employment and thereby boost economic revival.

For the factory sector, it was a rough 2020. PMI numbers for December did show that business activity is slowly and steadily improving. However, the eight core industries, which constitute 40 per cent of the Index of Industrial Production, contracted nearly 2 per cent in November. The current account being in surplus the last couple of months, due to fall in imports, is a also an indication of manufacturing activity not hitting top gear, yet. Latest data indicate a rise in imports, which is a positive sign of revival of the economy. An efficient supply management in the background of subdued industrial production is thus needed.

Farm boost

The agricultural sector saw growth of 3.4 per cent in FY20. To top it, with the Government announcing policy measures such as the setting up of a ₹1-lakh-crore Agriculture Infrastructure Fund, increasing the fund allocation for the MGNREGA scheme and the Ministry of Rural Development in the 2020-21 Budget further strengthened the rural economy.

The upcoming Budget should further increase allocations for the agricultural sector including rural infrastructure. Also, expansion of welfare measures can be a key to winning the goodwill of the poor if tough reform measures are to be carried forward.

With the government announcing game changing land and labour reforms and evolving from Make in India to Make for World, there is a need to build confidence amongst the youth. India spends 4.6 per cent of its GDP on education, which should be hiked to 6 per cent to provide quality education and successfully implement the New Education Policy 2020.

If the pandemic has underlined anything, it is that the healthcare sector needs to be strengthened manifold and the Budget must come good on the Prime Minister’s promise of doubling the spending on public health.

The Finance Minister also needs to keep an eye on allocation of resources to gender budget so that benefits of development reach women. Fiscal measures such as an increase in the income -tax exemption limit; interest subvention on housing, education loans etc for women can be looked at.

Without further ado, infrastructure programmes need to be speeded up. The Budget allocation for 2020-21 of ₹103 trillion for infra projects should be increased sizeably to facilitate efficient building of infrastructure. Better infrastructure would, in turn, attract investments, generate employment and thereby give the much needed boost to consumer demand.

Agreed that the major challenge before the government is a deteriorating fiscal balance and an increasing fiscal deficit. The 2020-21 Budget did commit to a fiscal deficit target of 3.5 per cent of GDP. However in the light of the pandemic, the economic scenario has gone haywire and with the fiscal deficit touching 135.1 per cent of FY21 target in November 2020, the government’s fiscal commitment has been given up.

Under the current situation it may seem odd to talk about fiscal discipline and the FBRM Act. Though increased government borrowing will put pressure on interest rates and raise inflation, this is a price worth paying as the current focus must be on strengthening the people’s purchasing power and kick-starting the revival.

With a recovery now underway the need is to floor the pedal for development to move the Indian economy back into growth trajectory.

Shettigar is Professor and Misra is Associate Professor of Economics, Birla Institute of Management Technology, Greater Noida

Published on January 18, 2021

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