Can Union budget 2020 address economic stagflation in country?

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Can Union budget 2020 address economic stagflation in country?
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At the time when the country is facing through the toughest economic recession, all eyes gazed on the union budget presented by finance minister Nirmala Sitharaman. Even if there are few options left for the finance minister to work on to revive the economy of the country from stagflation.

There are certainly some sectors that need to be addressed by the finance minister in the upcoming budget. The looming threat of a rise in crude oil prices can push inflation much higher. The foreign oil-made up 84.5% of India’s needs in six months to September 2019`, and up to 83.3% a year earlier. The government is aiming to cut oil dependence to 67% by 2022 but local output has been falling year after year mainly due to aging fields and lack of major discovery. ONGC, the country’s largest producer of oil and gas, produced 10.25 million tonnes, 3.97% less than a year earlier.  With every US$1 rise in crude oil prices increases India’s import bill by about US$1.5 billion. This always adds to a huge trade deficit, putting the country’s foreign reserves to a stressful situation. The situation has worsened by escalating tension between Iran & the US. India has cut the oil price, even though India has cut the oil imports from Iran under the US’s pressure and is now depending mostly on the Saudi Arabia and its allies, along with the US.

The Current government is reluctantly acknowledging that the Indian economy has a growth problem,  and has so far desisted from announcing a big demand push, unlike by the previous United Progressive Alliance (UPA) government, which had faced the global financial crisis of 2008.  The growth strategies adopted by the current government so far to achieve Prime Minister Narendra Modi’s vision of making India a $5 trillion economy, has not quite materialised so far. The current government must realise that without a revival in consumer demand, investor sentiment which is at its lowest in six years,  the economic condition of the country is not going to improve. The government needs to address the structural issues in the economy including the liquidity crisis by the shadow banks. It must front-load a significant chunk of its proposed ₹102 trillion infra projects and fast-track work on the ground.

In the upcoming budget, FM can loosen the purse strings by relaxing the fiscal deficit target by half a percentage point and engineering a debt-leveraging exercise with the extra kitty.

Most economists and corporate honchos seem to be okay with it. If newly managed resources are spent in the infrastructure sector, and more so in small-ticket rural ventures, the demand will revive, luring cash-rich industries to invest more, which in turn, could help pull the economy up from the abyss.

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In her previous 2019 budget, Sitharaman set a fiscal deficit target of 3.3% for 2019-20; this was much stringent than that set in the UPA regime when it allowed the deficit to balloon to 5.7% in 2011-12 before a fiscal consolidation road map was by and large adhered to by successive FMs. A target of 3.2% was set in the 2017-18 budget.   Former chief economic advisor Arvind Virmani does not worry too much about not sticking to the fiscal deficit target. What he wants to see in the budget is an introduction of long-pending reforms on the direct tax code and the simplification of the goods and services tax (GST). “A short-term (12-18 months) increase in the fiscal deficit will be accepted by capital markets if they can be convinced that gains from efficiency and voluntary compliance will reduce the fiscal deficit over the next few years”…

 But above all the upcoming budget needs to address the growing issues of farmers and rural areas. There is now ample evidence that the rural distress is for real and government needs to recalibrate spending, by putting more money in rural infrastructure projects with quicker turnaround time as well as in the rural employment guarantee scheme.  With already a little room for any audacious act, consumer demand is in lacklustre, tax collection is at modest and the estimated GDP growth for 2019-20 is 5%, an 11-year low, the upcoming budget has to focus on policies to revive the economy keeping every other issue and priority aside.

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Can Union budget 2020 address economic stagflation in country?
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The government is aiming to cut oil dependence to 67% by 2022 but local output has been falling year after year mainly due to aging fields and lack of major discovery. ONGC, the country’s largest producer of oil and gas, produced 10.25 million tonnes, 3.97% less than a year earlier.
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