Indian Finance Minister Nirmala Sitharaman will be presenting her second budget on Saturday, 1 February. Faced with an economic slowdown and widening fiscal deficit, she has to make a choice between growth and fiscal consolidation. The alternative, opting for growth by increasing government expenditure, would mean compromising on fiscal consolidation targets.
While growth is necessary to pull the economy out of the current slowdown, fiscal slippage may raise eyebrows among international rating agencies. A committee led by former revenue secretary N.K. Singh recommended in 2016 that the government should target a fiscal deficit of 2.5 percent by 2023. The consolidation roadmap by the Singh committee recommended bringing the fiscal deficit to 3 percent by March 31 2020.
But this is all far from the current reality. India’s Fiscal deficit reached 132 percent of this target in December 2019, with three months still to go in the current financial year (April 2019-March 2020). In a situation like this, both industry and corporates expect the government to come up with clean macroeconomic numbers so that their investment plans for the year do not go awry.
Indian Industrialist Naushad Forbes, in an article published in business daily Business Standard, said, “This budget should be judged on principles that bring clarity, light and cleanliness. There has been concern over the true budget deficit. The only thing worse than a bad number is not knowing how bad the number is (some say the true deficit is 4.7 percent)”.
In what may further deepen Sitharaman’s challenge, falling revenues, low investment, and lacklustre growth may leave her limited elbow room to cater to people’s expectations on tax relief. Workers are expecting to see a cut in income tax rates, particularly since the government gave tax relief to corporations last October.
Supriya Shrinate, a spokesperson for India's main opposition party Congress, said: “We will welcome it if the government gives tax relief to common man. However, given the limited tax payer base in the personal income tax front, we would like the government to give relief on indirect tax front as it will give relief to all citizens.”
In its report titled “Economy Watch”, global professional services firm E&Y’s chief policy adviser D.K. Shrivastava said: “Following the substantive lowering of the corporate income tax rates, there is an expectation that there would be some reform and reduction in the personal income tax rates.”
Another major challenge for Sitharaman is going to be predicting accurate nominal Gross Domestic Product (GDP) growth for the economy in order to derive a realistic tax target for the next financial year 2020-21.
“Nominal GDP is a very sensitive indicator. Accuracy in predicting this number is critical as it is the key to other projections like tax revenues,” said N.R. Bhanumurthy, professor with the National Institute of Public Finance and Policy (NIPFP). For 2019-20, the Indian government had projected a nominal GDP growth of 12 percent, which subsequently had to be revised downwards to 7.5 percent.