Why the Upcoming Budget Entails Difficult Decisions and Challenges for the Modi Sarkar

How the Ballooning Fiscal Deficit Presents Challenges for the Modi Sarkar?

With the Indian Economy in Dire Straits, the upcoming Budget for the Year 2020-21 is challenging and entails difficult decisions from the Modi 2.0 Government.

To start with, the Yawning Fiscal Deficit means that the Government cannot splurge and spend on already stretched public welfare schemes.

Indeed, as it is, the government is finding it hard to keep the Fiscal Deficit to below 3% as per the procedures and the rules for the same that have been in vogue for the last decade or so.

Added to this are the falls in GST (Goods and Services Tax) collections and what more, even the Direct Taxes (Income Tax etc) have shown a downward trend.

All this adds pressure on the Modi 2.0 Government as the Fiscal Deficit is arrived at after deducting Expenditure from Revenues.

Given that the Revenues in the past year are nothing to write home about, plus, more expenditure due to unplanned factors, means that the Government would have to resort to borrowing more as well as digging deep into other sources of revenue to keep the Fiscal Deficit in check.

What the Government is Doing and What can be Expected in the Budget

Some of these other measures have included demanding more Interim Dividends from the RBI or the Reserve Bank of India, as well as delaying the payout of the States’ share of Tax collections, including the key payout of the GST collections, which by the way are constitutionally mandated.

As it is, the RBI has done a huge favour to the Government by keeping Interest Rates low, and the space for monetary easing and monetary measures to kick-start and revive the economy is shrinking.

This leaves the government with the unenviable choice of resorting to a Fiscal Stimulus, which means that one can expect fall in Income Tax rates as well as some recalibration of the GST rates.

Of course, this would mean that the Modi Sarkar would have to forego a high portion of revenues and this essentially places it in a Catch 22 situation.

Either it has to raise more money to finance the deficit which means additional outflows on account of higher interest payouts as well as expensive borrowing, or it has to cut its revenue further, which again leads to having to find sources for its expenditure.

In the words of a layperson, once you spend more money than you earn, the implications are that you would either go deep in debt, or you would have to drastically cut down on your expenses.

The Modi 2.0 Dispensation and the Difficult Decisions Ahead

And this is what the Difficult Decisions in the Budget are likely to be as the Government is expected to cut down on its expenditure.

What this means is that the funding for several welfare and populist schemes would reduce as well as increasing fares of Train Travel and other means of revenue.

Of course, till date, the Government is only talking about stimulus and hence, one has to wait and see how they are planning to make up for the shortfall.

On the other hand, if Income Tax rates are raised or Interest Rates cut further, the Government would find it hard to keep its core voter base of the Middle Class happy and added to this, if the GST rates are tweaked too much or FDI or Foreign Direct Investment is allowed in hitherto closed sectors, its other vote bank, namely the traders and small businesspersons would be left high and dry.

This is the reason, why there is both an Air of Anticipation and a Feeling of Dread as the Budget Day approaches.

The Peculiar Case of Stagflation and the Causes of the Same

Having said that, there are enough reasons to believe that whatever policy measures are announced in the Budget can also be reversed, as going by the experience of the past few years, this has been the norm wherein many of the so-called Game Changing announcements were rolled back within a few months.

The problem that the Modi Sarkar is grappling with as far as the Indian Economy is concerned is that we are in what is known as Stagflation wherein there is Demand Contraction or Stagnation accompanied by High Inflation, which means that though people are not buying and consuming, the prices of goods and services remains high.

This leaves neither the people nor the businesses happy as the former cannot and will not buy either it because they lack the money or the prices being high.

This peculiar condition arises when there is less disposable income for the consumers and high input costs and high manufacturing costs for businesses.

At the same time, the Equity Markets seem to be on a high, which shows that there is enough liquidity in the hands of speculators and market traders which again confounds the trends in the Broader and so-called Real Economy.

Conclusion

A way out of this would be to redistribute some of the liquidity towards the consuming classes either through a Wealth Tax or Higher Income Tax for the Rich.

Further, an UBI or Universal Basic Income Scheme can be unveiled that would put more money into the hands of the poor and the middle class.

Of course, these are difficult decisions as the Modi Sarkar would be ruffling quite a few people this way.

However, when drastic measures such as Demonetization can be taken, one can wish for them to take some bold decisions such as the ones that we listed above.

To conclude, we are all waiting for the Budget Day.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.