Home >Budget 2019 >News >Budget 2020: Fiscal stimulus key for revival, but inflation to be a challenge
Finance Minister Nirmala Sitharaman will present her second Budget on February 1. (iStock)
Finance Minister Nirmala Sitharaman will present her second Budget on February 1. (iStock)

Budget 2020: Fiscal stimulus key for revival, but inflation to be a challenge

Economists ask for tax relief for middle-income investors, besides a cut in small savings interest rates

As India faces the twin hazards of slow growth and rising inflation, economists are sharply divided on the remedies for the problem. Some say, a fiscal stimulus can revive the investment cycle and kick-start the economy, while others believe a steep rise in fiscal deficit can push up borrowing costs for the private sector. If the Reserve Bank of India (RBI) chooses to remain accommodative with interest rates, it could also stoke inflation. A fiscal stimulus can increase corporate earnings and, hence, the returns of equity investors. However, if this is accompanied by high inflation, much of the earnings will be eroded. Debt investors will also suffer from high inflation because they are locked into fixed rates.

Economists who support fiscal expansion have outlined a few key sectors. Dharmakirti Joshi, chief economist, Crisil Ltd, identified income transfer to farmers, spending on the National Rural Employment Guarantee and construction as prime areas for the fiscal push. Saugata Bhattacharya, senior vice-president, business and economic research, Axis Bank, underlined the need to improve farmers’ incomes. “Focus on expanding disbursals of income transfers to farmers and others via the PM-KISAN Yojana and similar projects," he said.

On infrastructure, Bhattacharya said programmes like the Partial Credit Guarantee scheme and last-mile funding for affordable housing projects could help.

Another area for a fiscal push, according to Bhattacharya, is micro, small and medium enterprises. MSMEs are producers as well as large consumers; they are also a large source of employment and improve business confidence, he said.

Arun Singh, chief economist, Dun and Bradstreet, has a different take. He noted that given the deceleration in growth during 2019, it is likely that the fiscal deficit target will be breached. “Six months down the line from the final Budget 2019, optimism over domestic growth prospects have deteriorated rapidly over the unfolding of events, globally and domestically. Sharp deceleration in growth has led to perceptions that India might miss the goal of becoming a $5 trillion economy by 2025," Singh warned. An increase in the fiscal deficit will negatively impact economic growth, he added. This is because a higher fiscal deficit can increase inflation, which in turn can force RBI to raise interest rates and throttle investment growth.

On the taxation side, economists have asked for some relief for the middle class and the real estate sector. Bhattacharya asked for calibrated tax cuts for middle-income households, which will boost disposable incomes, improve sentiment and increase domestic savings. “Additional tax benefit, such as on purchase of second homes, will help increase demand and can be introduced for a limited period," said Joshi. At present, home loan principal repayments qualify for deduction under Section 80C and interest repayments under Section 24 of the Income-tax Act. First-time homebuyers get an additional deduction under Section 80EE for interest paid up to 50,000 per year if certain conditions are met.

Economists also propose reduction in the interest rates of small savings schemes such as Public Provident Fund and National Savings Certificate. The rates are fixed by the government every quarter. “High small savings rates continue to be a structural curb on efforts to improve transmission. Small savings rates did not come down despite a general reduction in interest rates and continue to be significantly above deposit rates offered by banks," said Joshi. Small savings rates were pegged to the yield on government securities in 2016, but they tend to be sticky.

Boost to spending can revive the economy, which will improve the returns of equity mutual funds. However, a possible surge in inflation poses a key challenge. A careful tightrope walk is what is required.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePapermint is now on Telegram. Join mint channel in your Telegram and stay updated

Close
×
My Reads Redeem a Gift Card Logout