Budget 2020: Rising inflation, mounting fiscal deficit; what govt can do in coming budget

Published: January 17, 2020 5:14:22 PM

Budget 2020-21: In order to stimulate economic growth, it is imperative the government ramps up expenditure outlay in core sectors like infrastructure, railways etc. in the upcoming budget.

Budget 2020, Union Budget 2020 India, Budget 2020 India, Budget 2020-21, nirmala sitharaman, sensex, niftyUnion Budget 2020 India: Further, expectations are high for direct tax-related reforms such as an increase in income tax slabs or rebates.
  • By Ajit Mishra

Budget 2020 India: In order to stimulate economic growth, it is imperative the government ramps up expenditure outlay in core sectors like infrastructure, railways etc. in the upcoming budget. However, given inflationary pressure and mounting fiscal deficit, it is going to be a tough task. Nevertheless, industry and market participants hope that the budget 2020 should bring in certain reforms to put the economy back on track.

In budget 2020, an investment plan for strengthening infrastructure and increasing private investments in manufacturing will be keenly awaited. Further, more clarity regarding the government’s five-year long-term plan of Rs 102 lakh cr for infrastructure projects (as some of the funds would come from budgetary resources) may be provided. Further, expectations are high for direct tax-related reforms such as an increase in income tax slabs or rebates. This is likely to lead to more disposable income which will, in turn, boost consumption and spending and should benefit sectors like Auto, Consumer Durables; etc. Apart from this, reforms in Banking/NBFCs (to address liquidity crunch and for improvement in credit off-take) could help in boosting demand and growth.

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We believe agriculture & allied sectors would remain priority sectors for the government. The government-backed schemes such as NREGA, Mandi reforms, PM-Kisan schemes etc. would provide relief to farmers as well as benefit rural economy. Thus these steps will work towards achieving the target of doubling farmers’ income by 2022. The budget is likely to focus on several rural and social schemes too. Increase in allocation towards several welfare schemes such as Pradhan Mantri Gram Sadak Yojana (PMGSY), Pradhan Mantri Awas Yojana – Gramin etc. will continue to provide rural economy a much-needed boost. Further, measures to grow micro, small and medium enterprises (MSMEs) may also be proposed.

The government is expected to address the inverted duty structure on several imported products e.g. certain steel products, calcined alumina; etc by slashing the import duty on raw materials; thereby benefitting the domestic metal players. Currently, domestic manufacturers pay a higher price for imported raw material (due to higher import duty), while certain finished products are imported at lower duty.

Roadmap for containing fiscal deficit

While we believe that the budget would focus on reviving economic growth through various sops, the government must attempt to adhere to fiscal discipline. It is almost a given that the government is likely to miss its fiscal deficit target of 3.3% given the current slowdown leading to lower than expected tax collections. However, the extent would be important- as a 20-30bps miss- we believe the market would take it in its stride considering the slowdown. However, anything beyond that would be detrimental to the markets and economy.  In order to be closer to the fiscal deficit target, the market expectations would be to speed up the disinvestment process and ramp up tax collections. In nearly 9MFY20, the government has only managed to achieve only ~17% of its disinvestment target of Rs. 1,05,000 cr. Therefore the roadmap for disinvestment plans would be actively watched by the investors.

(The author is VP Research, Religare Broking. The views expressed are the author’s own)

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