2019 has been a year when the economy went through various phases of economic swings. By now it has been accepted that there is a slowdown in the economy. The emphasis so far has been on monetary policy where the MPC has carefully deliberated the situation and lowered the repo rate by 135 bps. This was good from the supply side where the attempt was to make the cost of capital lower for the industry. But with the problem being largely on the demand side, the impact tended to be limited. There has hence been a call for a fiscal stimulus, given the fact that monetary policy has its limitations.
How to make things work this time?
The Union Budget is hardly three weeks away. There are talks about tax sops and financial incentives. But none of them will go very far if the basics are ignored. After all, the economy is hurting real bad. And to understand the situation prevailing behind the pain, it is essential to understand why the agriculture sector matters.
First, over 50% of India’s population depends on the rural economy. Yes, you got it right we are talking about agriculture. Irrespective of the contribution of the agricultural sector to India’s GDP, the sheer scale of the population requires any government to pay heed to the well being of this sector and to make it sustainable, not through state benefits, but through policies that make this sector healthy.
Second, it is important to note that unlike the Asian tigers- including China, Korea, Taiwan, Singapore among others – India is not an export-driven market. It is a consumption-driven market. When you have half of India’s population living in rural areas, this becomes a critical consumption market – especially for things like motorcycles, tractors, harvesters, seeds, fertilizers, nutrients and a host of consumer goods.
The farmer is allowed to earn very little for his produce which is one of the reasons why the farm sector’s contribution to India’s GDP is just around 14%. If the government wants the farmer to earn more, it must make provisions for him to earn a better price.
What the government can do is that it should immediately allow the farm sector to create an autonomous body like NDDB, which comes in as a market maker. Unless the farmer can receive 50% of the market price for his produce, the farmer will remain exploited.
What to expect in Budget 2020?
The Road Transport and Highways ministry have sought a hike in budgetary allocation by Rs 8000-10,000 crore for the financial year 2020-21, as per the senior official statement.
Higher budget allocation towards building roads and highways is an indication of the government’s focus on infrastructure creations. This is expected to have a multiplier effect on the country’s economic growth which has hit a six-year low.
Now looking at what market seeks from Budget
In 2019, the Nifty 50 index of the National Stock Exchange delinked itself from the economy. Growth expectations for the gross domestic product (GDP) kept sinking through the year, from over 7% to below 5%. Yet the Nifty gained 12%, somewhat above its historical annual average.
If we look at this dichotomy. The stock market represents our collective belief in the future of the economy. The consensus view is that the Indian economy is going to turn around soon. Moreover, while the Nifty has done well, the rest of the equity market, not so. The Indian markets have underperformed the rest of the world.
In order to stimulate India’s economy and budget, demand one way is to reduce income-tax rates. There has been a great deal of speculation, almost a consensus, that Budget 20 will cut personal tax rates, and perhaps levies on capital gains.
The other route to pumping money into the economy is via government spending, on infrastructure. Our infrastructure plans are dogged by problems with land acquisition, planning delays and poor coordination between the myriad departments involved.
A broad-brush budget level plan will not work. Concerned agencies would have to carefully examine the projects from across the nation that is ripe for implementation. Where the allocation of funds results in rapid work and the consequent release of demand for goods and services into the economy.
What the government should focus for India’s economy and budget?
The government should focus on improving the institutional structure and removing obstacles that constrain growth. Undertaking difficult and bolder reforms of land, labour, the business environment, and the public sector will not help in reducing the cost. Improving the ease of doing business in India but also unleash India’s economic potential in the future.
Necessary amendments should be made to simplify the GST structure, rationalize the rates, and ensure a seamless flow of input tax credit, among others. This will go a long way in improving compliance and competitiveness. This will definitely help India’s economy and budget.
There’s hope that the policies which will be announced by finance minister Nirmala Sitharaman on 1st February will rescue the economy from its growth slump and get the economy back on track.