2020 is going to be a make-or-break year for the Indian economy as the government would need to reverse the declining growth trajectory that it hit in 2019. Strapped of resources, the government has already announced a spending cut.
If the government continues to slip down the 2019 slope, we might be facing serious economic hardships by the end of the year.
With demand declining, consumption sliding and tax revenues under stress, the 2020 budget would be a decider for this government. Most economists now believe that 2020 would not be radically better than 2019.
Growth in the next fiscal could only be around 5.5% but that may not be enough to create new jobs or restore demand.
If Finance Minister Nirmala Sitharaman is not able to spin some magic in her first full budget, the BJP might end in a place where no amount of political rhetoric would be able to save them.
A month to go, things are not looking up for the government or the economy. Seasoned economists like former Chief Economic Advisor Arvind Subramaniam are now saying things are going to get worse before they get better. The question is how bad will they get?
2019 was a year that saw three budgets, if not more. The first budget was presented before the Lok Sabha elections in which the government announced PM Kisan while the new Finance Minister Nirmala Sitharaman presented her first budget after the government was re-elected.
The third budget, perhaps the most significant one, was presented in September when she slashed Corporate Tax to boost investments in manufacturing and other sectors of the economy. A series of mid-year policy announcements may have helped create the illusion of action, but don’t seem to have much impact.
2020 is expected to get off to a bad start as the government does not have too much gas in the tank to boost consumption as tax collections have been way short of expectations this fiscal.
The government has breached the fiscal deficit targets for this year and even off-books borrowings would not be enough for the deficits to remain in the same ballpark.
The government has now brought in spending cuts in the last quarter of the year. “Considering the fiscal position of the government in the current financial year, it has been decided to cap the expenditure in the last quarter/last month of the current financial year,” an official memo issued by the Economic Affairs department said.
The move was expected, considering the government’s tax collections have taken a massive hit this year and this indicates that government spending is unlikely to be a growth driven the last quarter of the current financial. From the looks of it, the first quarter of the calendar year is not going to see a major shift in policy and hence we must brace for sub-5% growth.
It would then be over to the budget and the big question is what path would the government take? Will the government try to boost middle class spending by bringing down Income Tax rates or would they try to reverse the direction of economic policy and abandon their trickle-down economics? The long and short of it comes down to one question-will it be more of the same or will they make a serious course correction?
The biggest problem for government is that agriculture and industry, which together employ around 3/4th of the working population, are in deep distress. Agriculture employs roughly 60% of the population and industry another 12%.
Unless the government is able to get agriculture growth upto 4% or more for a few quarters, we are not going to see a revival of demand. Slow agrarian growth has pushed India into a vicious cycle as it has led to the contraction of demand for the first time in four decades.
PM Kisan was perhaps the last resort for the government but considering that it has not helped with farm growth. The government may have allocated Rs 75,000 crore for the scheme it seems unlikely that they would be able to spend more than Rs 50,000 for the scheme. It seems unlikely that the government would raise spending on the scheme in the next fiscal, considering it has serious trouble on the fiscal front.
The government would be thinking about direct transfer of food and fertilizer subsidy to the farmers as an effort to bring down its subsidy bill but that would lead to serious problems, at least in the short term. The big question is if MSP is going be a number on paper or if the farmers would actually benefit from it?
Fact is that the government has run of out magic potions but what is worrying the government the most is that patience is running thin and people no longer think that the government would be able to deliver on its economic agenda.
They youth are getting restless and if the Modi government doesn’t start delivering jobs, it might have to face serious backlash from the youth by the end of the year, if not earlier.
A lot would depend on the way Finance Minister Nirmala Sitharaman approaches the budget. She would have to go back to UPA’s economic plan if she wishes to restore growth and bring prosperity to people but that would mean reversing what she did in September 2019. Will she?