Union Budget 2021: FM Sitharaman faces flurry of woes

Union Budget 2021 is an uphill task for FM Nirmala Sitharaman
Finance Minister Nirmala Sitharaman

With failing vitals like growth, unemployment and inflation, drafting India’s annual financial statement is nothing short of a herculean task this time.

The pandemic-driven contraction impelled by low levels of consumer spending and low credit facility is alarming.

To power the Indian economy back on track, Finance Minister Nirmala Sitharaman will need to take a leaf out of Keynesian economics and ensure targeted spending without severely affecting the fiscal consolidation roadmap.

The Union Budget will be presented on February 1.

The underlying macroeconomic equation is simple. Consumption, investment, government spending and net exports determine GDP growth, with other crucial factors like inflation and unemployment at play.

But ensuring the equation works in the economy’s favour will require careful planning and religious execution.

Green sprouts

According to the estimate released by the Ministry of Statistics and Programme Implementation (MoSPI), the gross domestic product (GDP) is expected to contract by 7.7 per cent in 2020-21. The estimated figure for the previous year is 4.2 per cent growth rate.

This is the first time India's growth rate is falling in the negative trajectory after the economic liberalisation in 1992. The International Monetary Fund  (IMF) has also seconded the MoSPI's estimate by projecting a contraction of 8 per cent in the last fiscal.

However, things are expected to look up in the upcoming financial year. The IMF expects the Indian economy to become the fastest growing economy with 11.5 per cent growth the next fiscal and 8.8 per cent the year after.

The projection is encouraged by the less than expected downturn in Q2 of 7.5 per cent after a contraction of 23.9 per cent in Q1.

The massive roll-out of the COVID-19 vaccine this year and the possible containment of the pandemic are also cited as reasons for the positive outlook.

These estimates will play a major role in determining the fiscal deficit target as a robust growth rate should translate into higher tax collection and revenue. A higher revenue estimate will motivate the government to increase its spending and put the economy back on the growth trajectory.

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A man wearing a protective mask walks in front of a closed shop during the nationwide lockdown, imposed in wake of the coronavirus pandemic, in Amritsar, Thursday. Photo: PTI

Depressed consumer demand

But rosy estimates will provide no solace if the government does not use it to place a reasonable amount of disposable income in the hands of the middle-class consumer.

A sustained higher growth would be next to impossible if it is not backed by the strong marginal propensity to consume. 

A look at the RBI's Consumer Confidence Survey shows that though consumer confidence is steadily gaining every passing month, it is significantly low compared to the figures a year ago. The November 2020 CSI reading came in at 52.3 against 85.7 in November 2019.

The unemployment factor coupled with the strained government spending both by the centre and state and inflation has taken a severe toll on consumer sentiment.

empty wallet
Financial discipline is helpful in warding off loss of money. Image courtesy: Somrak Jendee / Shutterstock.com

Lost jobs, shrinking incomes

The loss of jobs and the dip in salaried incomes further depressed consumption levels in the past year. An estimate provided by the Centre for Monitoring Indian Economy (CMIE) fixes the unemployment rate at 9.1 per cent in December, 2.5 per cent higher than the previous month.

The government will also need to address the issue of inequality further widened by the lockdown. It will need to ensure that rural consumption is rejuvenated with better jobs and higher disposable income.

Boosting employment will only be possible if the government invests a considerable amount in labour-intensive sectors like MSMEs and places more disposable income in the hands of the common man through schemes like MGNREGA.



Though the CPI inflation fell within the upper tolerance limit for inflation rate (6 per cent) decided by the central government in December (4.6 per cent), it exceeded the upper limit in all the other months last financial year, pushing the average above 6 per cent.

This limits the scope of RBI's monetary policy and places the onus of boosting demand upon the Finance Ministry through fiscal measures.

Alternatively, the government may also revise the inflation target to leave enough room for the RBI to revise policy rates.

Credit facility

The credit situation in the country is also currently undergoing a major crisis. While the rise in the number of bad debts following the pandemic severely affected the lending capacity of banks, the fall in incomes constrains the common man from taking loans or making investments.

The lack of disposable income and credit facility is directly responsible for the huge damage to the demand side of the economy. Tax deductions and extension of credit facilities will therefore be the most-watched out policies in this time's budget.

The task that lies ahead would involve a careful realistic estimate of the revenue and a targeted allocation of resources to revive the economy.   An over-optimistic projection of tax revenues will take a toll on the expected expenditure and eventually the revival of the economy.

While a significant chunk of resources should be allotted to healthcare to ensure the containment of COVID-19, the government should also do the needful to revive struggling industries like hospitality, aviation and MSMEs.

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