Finance Minister Nirmala Sitharaman on Saturday will present her second Union Budget, and her first full one. With the Indian economy going through a slowdown, this will be one of the most scrutinised Budgets in recent years. Let us look at some of the problems Sitharaman needs to address, and the steps she is likely to take to overcome them.

A day before the Budget, Sitharaman tabled the Economic Survey for 2020-’21 in the Parliament on Friday afternoon. The survey predicted that Gross Domestic Product will grow between 6% and 6.5% during the next financial year. It also projected industrial growth at 2.5% but added that there was a chance of a widening of the fiscal deficit.

Chief Economic Advisor KV Subramanian said the Indian economy had hit “a trough” or a low point in terms of economic growth but expressed hope of achieving the targeted Gross Domestic Product growth in the 2020-’21 financial year.

Poor growth

The finance minister faces rapid economic slowdown, with the government’s own projected Gross Domestic Product growth rate at 5% for 2019-’20, which would be the lowest in 11 years. The nominal growth rate is projected to fall to a 42-year-low, according to The Economic Times. A revenue shortfall of Rs 2 lakh crore is also expected in the 2019-’20 financial year.

Many other growth indicators are also at record lows. Investment growth for this financial is forecast to shrink to 1%, the lowest in 17 years. Private consumption is expected to grow at just 5.8%, the lowest in seven years. Manufacturing is likely to grow at just 2%, the lowest figure in 15 years. The agricultural growth rate is also not likely to exceed 3%.

Also read: What Nirmala Sitharaman must do to salvage India’s flailing economy

Rise in inflation

Meanwhile, retail inflation, which the government had managed to keep to manageable levels for most of the five and a half years it has been in power, spiked to 7.35% in December, due to a sudden rise in vegetable prices. The Reserve Bank of India, which had cut the repo rate six times in 2019, stopped after the December inflation figures were released, and may continue to hold fast until the retail inflation rate recedes again. The repo rate is the rate at which commercial banks borrow money by selling their securities to the central bank.

Fiscal deficit

The government had set the fiscal deficit target at 3.3% while presenting the Interim Budget on February 1 last year. However, the actual deficit is likely to overshoot the target by at least 0.5 percentage point. If the government decides to stick to keeping the fiscal deficit in check, it will have to curtail expenditure in the 2020-’21 financial year. This in turn will hurt growth, which is already projected to fall to an 11-year low. The promise of making India a $5-trillion economy by 2024, unlikely to materialise to begin with, will likely become impossible.

India’s consumption expenditure was badly hit in 2019, thereby affecting growth. Also, the government will struggle to mobilise resources to increase expenditure in order to boost the economy.

Unemployment and farm distress

Meanwhile, unemployment and agricultural distress are problems that continue to persist. According to the Centre for Monitoring Indian Economy, the unemployment rate rose to 7.7% in December 2019, up from 7.48% the previous month. The government has not released unemployment figures for the last two financial years. In 2017-’18, the rate of unemployment stood at a 45-year high of 6.1%. Meanwhile urban unemployment numbers are higher than for rural areas, reflecting a decline in economic activity in the country.

The agricultural sector continues to go through a crisis, with a 16% drop in the export of farm produce in the first seven months of the 2019-’20 financial year, according to The Hindu BusinessLine. However, food prices continue to remain high.

Solutions?

Sitharaman may focus on giving a boost to the investment climate by providing tax concessions to private investors and easing norms for business, Business Standard reported on Tuesday. With revenue projections not meeting actual targets in 2019-’20, the finance minister is likely to set a much more realistic target, the daily reported.

The government may also mention off-budget expenditures during the presentation of the Budget to give a realistic view of the fiscal deficit. In October last year, former RBI Governor Raghuram Rajan had alleged that India’s fiscal deficit numbers “conceal a lot”, which could in turn push the Indian economy into a “worrisome situation”.

However, there is unlikely to be any concession in corporate taxes, as Sitharaman cut such taxes for domestic firms from 35% to 22% in September last year. But a change in tax slabs for the lower income range, and an increase in eligible deduction under Section 80C of the Income Tax Act, is likely, according to Moneycontrol.

The government may focus on higher spending for creating agricultural infrastructure, including storage facilities, and putting more money into the hands of rural citizens, in an effort to boost rural demand. It may also extend the scope of the PM-KISAN scheme, to provide further income support to farmers.

The Budget may also announce additional support for farm subsidy schemes, allocation for food processing schemes and efforts towards increasing non-farm productivity. There may also be a focus on the dairy sector, which is showing signs of improvement.

To help domestic manufacturers, the Budget may increase custom duties selectively. The Make In India initiative is likely to get a greater push from the government. It could focus on curbing imports of non-essential items. Thus, the Budget is likely to attempt to provide a stimulus to staple demands of consumers.

In January, Prime Minister Narendra Modi held meetings with top business leaders, economists and agricultural experts of the country, and asked them to provide candid feedback on what has contributed to the economic slowdown. However, Sitharaman did not attend these meetings.

On the other hand, on December 13, Sitharaman claimed that the “results of some [economic] measures have started showing”. At a press conference, Chief Economic Advisor KV Subramanian said record Foreign Direct Investment inflow had helped the government. “The evidence of measures to boost investment is actually seen in the record FDI inflows – $35 billion in the first half of 2019-’20 as against $31 billion during the same period last year,” he said.

Subramanian said the government was focusing on increasing consumption to boost growth and highlighted measures such as cutting corporate tax, capitalisation of public sector banks and providing funding to realty projects.