The Union Budget 2020-21 is set to be presented on 1 February 2020 by Nirmala Sitharaman, the Finance Minister of India. This year’s Budget is very critical as it has come at a time of weakening economy.
The markets are expecting the Budget amendments to provide credible fiscal results and step by step consolidation to increase the revenues through divestment and monetisation of assets.
The last few quarters haven’t been great for the Indian economy. The quarter that ended in September 2019 saw the gross domestic product growing at only 4.5%, which happens to be the slowest in the past 26 quarters.
Various factors haunt the Indian economy. Internal factors such as reduced consumption and credit crunch have not helped the economy. The Sino-American trade war has had a considerable effect, causing an economic slowdown.
The government and the Reserve Bank of India (RBI) have played their part in addressing issues. The Finance Minister announced growth and economic boosters in two rounds to support the ailing economy, and it has shown some positives now.
The Reserve Bank of India also came up with measures to boost the economy. It cut repo rates by a massive 135 basis points during the year 2019. No other Central Bank in Aisa cut as much basis points as the RBI did last year.
As per a report of the Bank of America Merrill Lynch, the Indian Government missed out on a whopping Rs 850 billion on divestment. This may have caused the net collection lag by Rs 2.8 trillion, which is almost 1.4% of the GDP.
Apart from that, the government has commitments of about Rs 3 trillion towards fertilisers, food, and subsidies for fuel. Furthermore, the Union Government may have to pay states around Rs 600 billion due to a shortfall in the GST collection.
The best way to address the above concern is by limiting the expenditure well below the revenue collection. But that is hard to do in a developing nation, hence, increasing the revenue collection to match the spending is the most suitable option.
This can be done by restructuring direct taxes, achieving a reasonable fiscal deficit, and strategic spending by the government. The government may also consider monetising some of its assets through divestment.
The markets expect the Budget to include some positive for them. Reduction of tax on capital gains, incentives for the realty sector, and providing credit support for small businesses are some of the expectations.
Last June, the markets shot up as they expected favourable amendments in the full Union Budget for FY 2019-20. But, the government had other ideas, and this led to the markets collapsing. They again shot up when the corporate tax rate was reduced in September.
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