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Explained: 5 things to watch out for in Budget 2020

Union Budget 2020: The most crucial thing for boosting growth is not whether the fiscal deficit target is flouted or not, rather the level of revenue deficit and the govt’s intention towards reducing it to 0% (of GDP) in the next few years.

Explained: Five things to watch out in Budget 2020 Finance Minister Nirmala Sitharaman will present the Union Budget 2020 in Parliament on Saturday. (File Photo)

Finance Minister Nirmala Sitharaman has an unenviable task ahead as she rises to present the Union Budget for the financial year 2020-21 (FY21). That’s because the Indian economy has been decelerating fast — just on Friday, the government cut the GDP growth rate for 2018-19 from 6.8% to 6.1%. The growth rate in the current year is already expected to be at a six-year low.

Click here for LIVE, real-time explanation of the Union Budget 2020

The growth slowdown is not just sharp but also quite widespread — almost all the sectors from agriculture to manufacturing to different kinds of services have witnessed a slowdown in economic activity.

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What are five things to watch out for in the Union Budget 2020?

#1: Nominal GDP growth

This is the most important number in a Budget and it forms the base of all other variables. It would be mentioned in the “Budget at a Glance” document. In the last full Budget that was presented in July 2019, the government expected nominal GDP to grow by 12% in 2019-20. As it turns out, the actual number is likely to be 7.5% or even lower. This dip completely alters the likely real GDP for 2019-20; real GDP is derived after subtracting the annual inflation (roughly 4% for the year) from nominal GDP. So the question is: What is nominal GDP for FY20-21 that the government hopes to achieve. It has to be better 7.5% but it can’t be a number dramatically away from reality considering the economy is still not out of the woods.

#2 and #3: Fiscal and Revenue Deficit

Given that there are no engines of growth left in the economy, many have argued that the government must not sit back under pressure from the fiscal hawks, and should instead spend more to boost the overall demand and rekindle the animal spirits in the economy. However, a crucial thing, if the government decides to relax or postpone fiscal responsibility norms, would be if the government refocusses on revenue deficit as well. In 2018, the government had dropped targeting revenue deficit. This had meant that India increasingly borrowed money to finance its everyday consumption at the cost of funding capital expenditure. Typically, Rs 100 spent on capital expenditure by the government results in Rs 250 being added to the overall economy. If the government spends on revenue — such as salaries — the overall impact on the economy is less than Rs 100. So, the crucial thing is not whether the fiscal deficit target is flouted or not, the crucial thing is what is the revenue deficit and whether the government intends to reduce it to 0% in the next few years.

#4 An income tax cut

There are two reasons why the government may want to cut the personal income tax rates or at least rejig its slabs. For one, the corporate income tax rates or the corporate tax rates have been cut sharply last year. It makes sense to offer that relief to the taxpayers in the economy. Two, people have been hoping for an income tax cut for long, and it may be one way to allay the concerns of the middle class in India.

#5 Disinvestment targets

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The Prime Minister has been reiterating that the country cannot go forward without people looking at “wealth creators” with respect. The Economic Survey has already outlined the policies that need to be tweaked. A good way for the government to get out of the way of businesses in the country, and raise significant resources of its own in the process, is by divesting its stake in many public sector enterprises.

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First published on: 01-02-2020 at 07:13:41 am
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