Budget 2020: Higher allocation for MGNREGA can give boost to consumer demand, says Ranen Banerjee, Leader Economic Advisory Services, PwC

By: |
Updated: Jan 30, 2020 5:08 PM

Budget 2020 India: According to a recent report, India's fiscal deficit is expected to fall to 3.8 per cent and the upcoming Budget 2020 may set a target of 3.5 per cent.

Ranen Banerjee – Partner, Public Finance and Economics, PwC IndiaUnion Budget 2020 India: Ranen Banerjee – Partner, Public Finance and Economics, PwC India

Budget 2020-21: Indian economy is facing one of the biggest challenges in recent years. Many experts including Nobel laureate Abhijit Banerjee have likened it to a recession. The Nobel winner said that India could be going through a phase of recession and the data is supporting it. There are also indications of worsening fiscal situation. According to a recent report, India’s fiscal deficit is expected to fall to 3.8 per cent and the upcoming Budget 2020 may set a target of 3.5 per cent. Ranen Banerjee, Leader Economic Advisory Services, PwC India talked with Financial Express Online on current economic situations and his ideas for the Union Budget 2020-21. Excerpts:

Q – What are the challenges for Indian Economy?

A – Well, the biggest challenge with the finance minister now is that, there is a sagging demand, so there is a need to pump-prime the economy whereas the government is constrained with the revenue generation – the GST is not generating enough revenues as expected. The corporate rates, the tax rates have been cut to induce more investments so that also kind of puts of hole in the wallet of the finance minister and the other aspect is that disinvestment targets that the government has set, those are also not being met. Therefore, the challenge is that how do you pump-prime an economy while your revenues are challenged and given that there is an expectation from various quarters on managing the fiscal discipline, that is not letting the fiscal deficits run here by.

Watch Video: What is Union Budget of India?

Q. What are your expectations for economy from Budget 2020?

A – The expectation from the finance minister is that there should be a focus on efficiency of expenditure. Not only on the revenue front so the government has to look at those schemes where the government has been making allocations but those budget line items don’t end up spending the allocations so there is no need to provide allocations to budget line items to just satisfy certain stake holder groups. It is important to allocate more resources to areas or budget line items can consume it and which can have a higher multiplier effect. For example, the allocations given to the defence sector – is it all utilized? If not, should we be making a more realistic allocation to the defence sector. So that’s one example. The second example, generally we make much higher allocations to irrigation schemes. We make more higher allocations to sectors like airports or sectors like space research. If we believe that, these sectors won’t be able to consume as much as the allocation or if historically, the sectors have shown that they are not able to consume the allocations then there’s no point in making artificial higher allocations in those areas. So, there is a need to access the budget line items and see the historical trends.

Q. Your out of the box ideas for Finance Minster Nirmala Sitharaman on Indian Economy?

AThe one out of the box idea for the finance minister would be to make a very, very significant higher allocation for the MGNREGA because that is money which goes straight into the hands of the rural poor and that is a class which will consume that money and not save that money. Any money that we put in the hands of any other category of the consumer there could be only partial consumption. But that’s an area where full consumption and there will be immediate boost to the demand and that may help in putting the economy into the positive cycle.

One more area that the finance minister could consider, we always talk about either cutting down expenditure or generating more revenues to manage fiscal deficit, but if we break down the fiscal deficit a little bit, see we are about 20 trillion INR economy and if we take one basis point of that, it translates into 200 crores. So when we are talking about 0.1% slippage or 0.3% slippage, we are talking in the range of about 2000 to 6000 crores. So, that is the slippage that we are talking about. One area where the finance minister could focus on is the efficiency of the government procurement that happens. And let me elaborate this a little bit more. About 5 trillion rupees is spent on the capital account and if we take 40% of that 5 trillion as procurement of goods and services, it works to two trillion. Now in two trillion, we know that when the contractors and suppliers are contracting with the government, they provide for a longer payment realization time frame and therefore, there is a working capital block. Now, if we assume that the payment cycle can be compressed at the payment to the vendors can be compressed and the government says that we will make all the payments within one month and if we take an approximate block of six months of working capital, we are talking about 1 trillion rupees being blocked in working capital finance now if that is reduced to one month and if the companies are willing to share 50% of the working capital cost by a way of giving discounts for government supplies, we will be able to manage this 6000 crore deficit just by procurement efficiencies. The other area would be government contracts. Now we see all the infrastructure projects or any project have an atleast one year time over run. Now if there is an efficiency brought in there through a better project management and we can compress the timelines or deliver the projects within the timelines there will be a saving in the 6% escalation clause inflationary clause that we have with the contractors and if we assume that out of this 40%, 50% is for construction type of contracts which is 1 trillion and 6% of 1 trillion itself made the budget deficit gap that we are talking about. So these are very simple things that can be done and if there is a will, we can meet the deficit.

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.