From GDP Expansion To Demand: Key Challenges Facing India Ahead Of Budget 2020

The government has already announced a slew of measures in the recent past, ranging from a huge cut in corporate taxes to strategic disinvestment in four public sector enterprises.

From GDP Expansion To Demand: Key Challenges Facing India Ahead Of Budget 2020

Industrial production grew 1.8% in November, primarily driven by better manufacturing output

As Finance Minister Nirmala Sitharaman gears up to present her second Union Budget, all eyes are on any new announcements to revive the economy. After holding its position as the world's fastest-growing major economy for four years, India was predicted to emerge as the third largest economy after the US and China. But that script has gone awry in the past year. While the government has projected GDP expansion to hit the worst level recorded in 11 years, consumer confidence has dropped to the lowest since 2014. With the annual budgetary exercise just a fortnight away, economists highlight some key challenges facing the finance minister in pushing the economy to the governments ambitious target of $5 trillion by 2024.

Here are some key challenges facing the government as it prepares Union Budget 2020:

  1. GDP Slowdown: The GDP growth rate has been spiralling downwards in the last seven quarters. It slowed to 4.5 per cent in the July-September quarter - the weakest pace since 2013. In fact, the government has forecast growth of 5 per cent for the current financial year, which would be the slowest pace in 11 years.

  2. IIP Weakness: Industrial production grew 1.8 per cent in November, primarily driven by better manufacturing output and a favourable base effect, while the reading of contraction in the previous month was revised lower to 4 per cent from 3.8 per cent. Industrial production returned to an expansionary phase after three straight months of contraction.

  3. Low Consumer Confidence: Consumer confidence - which reflects various parameters such as employment, inflation, income and spending - is at the lowest level since 2014. It dropped to 89.40 points in the third quarter of 2019 from 97.30 points in the second quarter of 2019, according to the RBI.

  4. Rising Inflation: Consumer inflation - which is the rate of increase in consumer prices - worsened to a more than five-year high of 7.35% in December, thanks to rising prices of vegetables and especially onion, staying above the RBI's goal for the third month in a row. The RBI has set a target of containing retail inflation at 4 per cent in the medium term. The rise in retail inflation is stoking fears of stagflation i.e. lofty inflation and stagnant demand.

  5. Sagging Demand: Consumption in India has slowed due to low demand in the rural areas. As a case in point, the total passenger car sales in India fell 8.4 per cent in December, according to the Society of Indian Automobile Manufacturers. Sales of passenger vehicles - including passenger cars, utility vehicles and vans - declined 1.2 per cent to 235,786 units during the month.

  6. Fiscal Deficit Constraints: The government has set a fiscal deficit target of 3.3 per cent. But given the expected shortfall in revenue, the government is faced with the Hobson's choice of either relaxing the fiscal deficit target for FY20 or lowering expenses to stay close to its fiscal consolidation path and thereby risking further damage to the slowing economy.

  7. Madan Sabnavis, chief economist, CARE Ratings, reckons that the government will keep the fiscal deficit target benchmarked against the revised deficit number of 3.8-4 per cent. The government will have to garner revenue, while ensuring that discretionary expenditure is spent. The government is unlikely to opt for aggressive fiscal measures in Budget 2020-21, but will rather go for a larger fiscal deficit within tolerable limits, he concludes.

  8. GST Simplification: The GST was conceived as a one nation, one tax rate system. It began with five slabs and additional levies, but held the promise of three-rate structure over a period of time. A simplified GST would not only facilitate better compliance, but the incoming revenues will help the government to tide over its fiscal deficit woes.

  9. Anagha Deodhar, economist, ICICI Securities, agrees that the economy has slowed down significantly in the past few quarters. Even though growth is expected to pick up in FY21, the recovery is likely to be shallow and growth is likely to remain below its long-term potential. She expects some income tax relief in order to boost private consumption in the short to medium term, however, she adds, there are unlikely to be aggressive tax cuts as the government is walking a tightrope walk.

  10. The government has already announced a slew of measures in the recent past, ranging from a huge cut in corporate taxes to strategic disinvestment in four public sector enterprises: MMTC, NMDC, MECON and Bharat Heavy Electricals, and a Rs 102 lakh-crore infrastructure project pipeline, in an attempt to kick-start the economy.



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