Watch: India’s ‘make or break’ budget 2020⁠— once-in-a-career crisis offers Finance Minister Nirmala Sitharaman a fertile ground for creativity

• With the upcoming Budget 2020 on February 1, Finance Minister Nirmala Sitharaman may not be able to revive economic growth in one stroke, but she can definitely restore confidence among all stakeholders — the consumers, the businesses, and therefore, the investors
  
• The latest estimate for India’s GDP growth in the financial year ending March 2020 is 4.8%, according to the International Monetary Fund (IMF).
• There is a rising clamour for a cut in income tax especially for those lower in the income chain.

India went from being the world’s fastest-growing economy to the fastest-slowing economy in just a matter of months. With the upcoming Budget 2020 on February 1, Finance Minister Nirmala Sitharaman may not be able to revive economic growth in one stroke, but she can definitely restore confidence among all stakeholders — the consumers, the businesses, and therefore, the investors.


The latest estimate for India’s GDP growth in the financial year ending March 2020 is 4.8%, according to the International Monetary Fund (IMF). That is too slow for a country where an estimated 12 million young people are ready to take jobs every year.

Not just that, IMF’s has had to cut the estimate for India’s growth from 7.5% just about a year ago to 4.8% now. The Indian economy is slowing down so fast, even the experts can’t keep up with it.


Make no mistake, India did not wake up to the slowdown suddenly. “It started with commercial vehicles slowing down at the end of last year, then we had passenger vehicles, two-wheelers, white goods, consumer goods, and now we have rural demand. What are we waiting for?” veteran investor Vallabh Bhanshali of the Enam Group warned back in June 2019.

Budget is just a statement of accounts but it can inspire confidence

The biggest problem that Finance Minister Nirmala Sitharaman needs to address immediately is the lack of confidence. From top corporates to the common man, there is a sense of foreboding. From telecom to textiles, from car makers to builders, there are too many sectors neck-deep in crisis.Unemployment is high and the rising prices are making matters worse.

From the ill-advised Demonetisation to the rushed roll out of GST, the government has been arguing that what it is doing is ‘creative destruction’. But the time for justifications are over because the slowing economy hurts the poor the most, pushing the young among them to starvation and crime; they need money to survive, and confidence to aspire.

So what can the Narendra Modi government do?

The immediate need is to put some money in the hands of consumers. Nearly six months after the cut in corporate taxes, companies do not seem to be investing more to create jobs because there is no demand.

There are many factories or segments within them that are still idle. Lesser tax alone is not enough, companies need people to buy their stuff.

There is a rising clamour for a cut in income tax especially for those lower in the income chain. Hope floats that if people have more money they will spend more on essential items of daily use to cars and new apartments.

Inflation has to be low but when prices of food items are too low, it hurts the farmers.


And that is a big reason for India’s slowdown. Over half the country is dependent on farming for their livelihood in one way or another. When their incomes are curtailed, they tighten their purse strings. And when more than half the country’s population turns penny wise, there will be no aggregate demand for products and services. This will also worsen the income inequality.

Those better off will save more, while those down the social strata will face more pressure on their pockets. In the last five years, the average Indian has been earning less while the price rise has been steady. Meanwhile, many top industrialists have multiplied their wealth many times over. This should be a concern for the government too.


There is another challenge for Finance Minister Nirmala Sitharaman, even the government has limited money to spend on reviving the economy.

Penny-wise and pound foolish

Time and again, the government has thrown money ineffectively. One of them at keeping state-owned banks alive without really fixing the problem of inefficiency and corruption that plagues these institutions, that are very necessary.

A new crop of unpaid loans have further squeezed the economy. But as former RBI governor Raghuram Rajan said, just throwing money is not enough. The government has to take the unpopular decision of letting the bad companies die, and save the good ones that are just hurt by the environment.

The bottomline for Budget 2020

Not every problem can be solved in the budget. But the budget will be an important stage for the government to make a statement that can inspire confidence, signal what its priorities are, show transparency in its books, laws, and their enforcement.

All eyes will now be on the country’s finance minister Nirmala Sitharaman. And what creative ideas she comes up with to tackle a once-in-a-career crisis.

See also:
Budget 2020: FM discusses ways to leave more income to spend

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