Union Budget 2020: Government May Have To Go All Out And Spend

The choices for the government in Union Budget 2020 are rather limited. It has just to make a choice between going out and spending and expanding the fiscal deficit or curbing expenditure and hence growth.

Union Budgets are never easy to deliver and it only becomes harder, if you are staring at a mounting fiscal deficit on one hand and slowing economic growth on the other. A double whammy of sorts.

Not to worry too much about the fiscal deficit

The government at this stage, should loosen the purse strings and go all out to push growth even if it means expanding the fiscal deficit. A fiscal deficit number near 4 per cent should be tolerated, especially when economic growth is slowing sharply. This can be bought down gradually when tax collections start fructifying on economic growth.

The real worry is that an expansionary budget, may not go down well with the Sovereign Credit Rating agencies. The threat of a downgrade would loom, given economic slowdown coupled with a fiscal deficit expansion. This would surely make borrowing money abroad even costlier.

However, there are no easy solutions at the moment. The economy should be growing at a much faster pace, and the only way that could happen is when the government starts spending.

There are reports that the government may push for an income tax cut or offer income tax cut sops in the forthcoming Union Budget. This is highly possible, as this could leave higher disposable income in the hands of investors and hence push growth.

With autos, construction and real estate businesses under severe pressure, cutting the tax, especially in the middle income group could easily push demand in key sectors that generate employment. Another way would also be through handing cash benefits to the poorer section of society. This too could stimulate demand , especially of consumer goods.

At the moment there is little choice, but, to go out and spend. One will have to wait for the final outcome to unfold on Feb 1, 2020. It's time for very bold measures.