Budget 2020: Pushing Demand To Boost Economy Would Be Key

It's going to be one of the most difficult Union Budgets to deliver this time around with growth hitting a new 6-year low. Come to think of it, when we argue that India still continues to remain among the few fastest growing economies, one finds it a little funny. This is simply because India has the world's largest young population and when the demographics are so favourable, one would expect to grow much faster than the 4.5 per cent GDP delivered for the July-Sept quarter.

It would be rather repetitive to mention that auto numbers have slowed down, unemployment is rising and the fiscal deficit numbers are likely to worsen. Loan growth too has slowed, though one must admit that the stock markets are at record highs.

Stock markets have their own reason to rally and that is because of immense liquidity. When you have loose monetary policy around the world and when retail investors keep pumping money into mutual funds, equities are bound to rally.

Pushing demand to be key to economic revival

The only way to push demand for consumer goods, autos etc., is to place more money in the hands of individuals. This is going to come by either an income tax cut, cash giveways to the poor, job creation and/or easing liquidity conditions.

The Union Budget should therefore focus on all three aspects to push demand and hence economic growth. The Union Budget should see new incentives for job creation, including liberalizing FDI.

To increase income in the hands of individuals it would have to either cut income tax or generously dole out cash schemes for the poorer section. It maybe worth arguing here that the government should have gone in for an income tax cut, rather than a corporate tax cut last year. This is because the Rs 1.4 lakh crores revenue loss by way of corporate tax cut, could have been used for an income tax cut to spur demand.

Not sure whether corporates, who have benefited by way of a corporate tax cut, would use the money to expand operations, given that demand remains weak.

Another way to boost demand would be to ease liquidity conditions. There is still a lot of scope to do that, though one is not sure, how much of that would come through in the Union Budget. To be honest, the RBI has done its fair bit, in cutting rates many times, though this has failed to boost economic growth.

Conclusion:

Clearly, this would be one of the most difficult budgets that we are seeing in recent times. Finance Minister Nirmala Sitharaman has a choice between giving away generously to individuals and reducing expenditure or breaching the fiscal deficit.

If she is very generous she runs the risk of pushing the fiscal deficit closer to the 4 per cent of GDP mark, which is not going to be liked by Sovereign Credit Rating agencies.

There is no doubt the Union Budget is going to be a difficult one to balance this time round. The stock markets too may react in case it does not meet expectations. It has already run-up too sharply in the last few months.