EUR 125.00 For Business Accounts Only

MOSL: ECOSCOPE-Pre-Budget II: One thing to be done and another avoided

ECOSCOPE: Pre-Budget II: One thing to be done and another avoided

** The Union Budget 2020-21 will be announced amidst a very unfavorable background, leaving the government with difficult choices. With real GDP growth weakening to sub-5%, expectations run very high at a time when the fiscal space to stimulate the economy is very limited.

** Two major expectations from the budget are: (i) investment push by relaxing the fiscal deficit targets and (ii) boost to personal consumption by cutting personal income taxes. In our view, the former must be attained but with strict conditionality and only after the true economic and fiscal narrative is placed before the country, while the latter must be avoided despite the very strong urge.

** The most important announcement in the budget could be to make the event relevant by inducting 'public sector borrowing requirement (PSBR)' along with the central government's deficit/borrowing data. It is essential to inform the nation that PSBR is almost double of the reported deficit of ~3.5% of GDP, which has put serious stress on the domestic financial markets. Still, a very low current account deficit at this stage allows the government to expand its deficit by up to 0.5% of GDP (or up to INR1t), provided it is spent entirely and exclusively on investments. The additional deficit should be financed by foreign savings to avoid any further stress on the domestic financial markets.

** Nevertheless, the strong urge to boost personal consumption spending by cutting taxes or discouraging savings must be avoided because the problem lies in subdued personal income growth. If personal consumption is incentivized but income growth remains weak (as has been the case over the past 6-7 years), the economy will remain structurally vulnerable - and in fact worsen faster.