One number that would be keenly watched this year when Union Finance Minister, Nirmala Sitharaman delivers the Union Budget on Feb 1, 2020 is the fiscal deficit number for 2019-20 and projections for 2020-21. This number is nothing but the government's expenditure, minus its income.
The fiscal deficit number for 2019-20 was projected at 3.3 per cent of GDP, when the budget was delivered last year. Most analysts and economists are certain that this would be easily breached. The reasons are not far to seek. Direct tax collections have been poor and coupled with the corporate tax bonanza given last year an expansion was always expected.
Apart from this the divestment target is unlikely to be met, adding further pressure on the fiscal deficit. It will not be surprise if the fiscal deficit is projected to be in the range of 3.7 to 4 per cent. Stock markets would certainly not be too happy, if the fiscal deficit number breaches that number and is closer to the 4 per cent of GDP mark.
Projected number for 2020-21 too is important
While projected numbers have never matched the actuals, it would be important to see what the number would be. The government has to go all out and spend in 2020-21 to prevent the economy from sliding even further. However, the government like in the past would project a very decent number, so that the stock markets are not jolted.
Apart from this, what is also important is the fact that the government would not want to give the sovereign rating agencies and opportunity to downgrade India's sovereign rating.
This makes the fiscal deficit projections very important. If the government can stick to that number of 3.4 per cent and undertake expansion that would indeed be good. But, one thing is certain is that the government has to go out and spend no matter what. This would pull the economy further away from slowing and help growth.
Once the economy is back on its feet, direct tax collections are likely to improve and we would be able to see an economic revival of sorts.
Putting more money in the hands of individuals
It's also very important while the government spends, it should direct the expenditure in the right places. For example, a tax cut for the low and middle income tax slabs could push discretionary spending, which is the need of the hour.
This could result in higher disposable income and hence discretionary spending. If that works it could give demand a push to the auto space, two-wheeler space, push credit demand higher. Construction and housing too could get a fillip, pushing animal spirits in the economy.