With the country’s economy in shambles, every Indian has eyes on the upcoming Union Budget. This will be the first full-fledged budget of the government in Modi 2.0 era. While the last year’s budget has provided an impetus to the supply side of the economy, this year’s budget must focus on the demand side i.e. a rise in the consumption, both at micro and macro level.
Green light to infrastructure projects – The economy has come to a standstill and it must be the Union Government’s priority to increase demand, for which it will look to increase consumption through raising the autonomous investment – an economic phenomena which is known as Pump-priming. This would also generate employment. Similar to the strategy US adopted by following the Keynesian theory, and investing in infrastructure projects during the great depression of 1930. To tackle the major slowdown, US started building big projects like the Hoover Dam. Therefore, in the budget we can see the government giving green signal to various stalled infrastructure projects worth over ₹13 trillion as of the last December-ended quarter.
Income tax – Despite the expected loss in tax collection this year, going with the market expectations, the government might cut the personal income tax rate in the upcoming budget. A move that will leave working class with more disposable income, but the question arises that how the government will make up for a further cut in tax collection? Let’s see what government comes up with. An increase in capital gains tax maybe?
Policy shift – Keeping the Fiscal Deficit (FD) - difference between the total earning and total expenditure of the government, other than borrowing - under prescribed limit is of the utmost importance to the government. It is expected that the target of maintaining a FD at 3.3% of the GDP will not be met, and FD will be around 3.6%. The government can change its focus to Revenue Deficit (RD), which is the difference between the total revenue expenditure and total revenue receipts. Laying emphasis on RD will set a path towards economic rejuvenation. India should target RD like most of the emerging market economies as it will serve as an automatic counter cyclic stabilizer.
Foreign income – It has been a trend for foreign companies to invest in Indian stock market through Foreign Portfolio Investments (FPI). These investments are also called Hot Money as it comes fast and goes even faster. Through FPIs, a foreign investor realises a short term profit in the Indian market and then leaves it which makes us susceptible to fluctuation. Considering the openness of the economy when it comes to attract Foreign Direct Investment (FDIs), the government must focus on acquiring long term investment.
Sentiments and perception – Both the business and income class consumers are not very optimistic about the current state of economy as measures like demonetisation did not reap the desired results, and tax reforms like GST will prove to be fully beneficial in the long term only. The Finance Ministry might give a consumer centric budget revolving around the needs of the income class to revive their trust in the economy.
With a consumer base that is more than twice the population of the US, the dream of becoming a $5 trillion economy can surely come true if we make substantial structural changes backed by a few tweaks in our economic system!