A stagnating Indian economy puts pressure on India’s new Finance Minister Nirmala Sitharaman and there are multiple challenges that need to be addressed.
#1 GDP Growth
The Indian economy hit its worst time with the GDP being at a 5-year low in FY19. And with the global slowdown, it faces tighter financial conditions, weakening demand, and slowing private consumption.
Finance Minister might initiate a further interest rate cut by RBI. Efforts to increase demand, private investment and infra growth will work towards it.
Finance Minister might initiate a further interest rate cut by RBI.
#2 Infrastructure Spending
The BJP government promised increased spending on infrastructure as part of their manifesto or election pledge in 2019. As per analysts, India will need $1 trillion investment in infrastructure to push annual GDP up by only half a percent.
The Union Budget is expected to announce a plethora of large development project, and bonds to fund infrastructure. However, to achieve positive growth, the government will need at least 55% will have to come from public resources.
Union Budget is expected to announce a plethora of large development project, and bonds to fund infrastructure.
#3 Declining Savings
Declining household savings pose a serious threat to the GDP growth and macroeconomic stability. India’s overall savings rate declined to 30% from 34.6% from 2012 to 2017.
And the worst hit was the household sector which is the largest contributor to savings in the economy, declining to 16.3% from 23.6%. The budget is expected to raise tax incentives to encourage households to save more.
Budget is expected to raise tax incentives to encourage households to save more.
#4 Tax Revenue
One of the biggest fiscal challenges for the government is to shore up falling tax revenues. Then there are promises of lowering corporate tax rates and push spending.
With tax revenues sliding, there might be a temptation to impose higher taxes. On the cards is increased long-term capital gains tax, banking transaction tax and increase in surcharge for high earners. Inheritance tax and estate duty might be reintroduced.
The government will push for aggressive divestment to fund public investment push. PSUs like Air India, Oil and Gas enterprises among others are in line for private investment.
The government will push for aggressive divestment to fund public investment push.
#6 Income Tax
Before re-election, Modi government announced some tax relief in the interim Budget in February. But analysts expect finance minister Sitharaman to announce some more relief in the budget.
The budget is expected to be strongly pro-growth and tax sops will add stimulus to the slowing economy. Big tax cuts to boost consumption, higher exemption limit from 2.5 lakhs to near 5 lakhs, uniform corporate tax rates for all companies 25% and 15% dividend distribution tax are on the cards.
The budget is expected to be strongly pro-growth and tax sops will add stimulus to the slowing economy.
At 6.1% in FY18, India’s unemployment hit a 45-year high amid reports of statistical misappropriation. The budget will need to address this area of concern with expected labour reforms that will help recruiters have a steadier inflow and outflow of employees.
Further incentives are expected for hiring, and startups. Thousands of government vacancies remain unfulfilled which necessitates an extensive recruitment drive.
#8 Water Crises
PM Modi talked about the water crises in his first address to the nation after re-election. The urgency is expected to be a focus in the Union Budget. Incentivised saving water and penalizing its excessive use will be the theme of policy reference and tax proposals.
Sitharaman’s first budget could see a Water Fund to tackle the rapidly depleting ground water and melting glaciers. The new Jal Shakti ministry which was formed under the Modi Government could be set for bigger budget allocation.
Jal Shakti ministry which was formed under the Modi Government could be set for bigger budget allocation.