In the first week of January the next budget is just a month away. One wonders if the timing is not too late to incorporate any of the bright sparks that emanate from the meeting in the union budget. Generally, pre-budget consultations start way back towards the end of October for next year’s budget. The covid pandemic would have precluded any of that exercise this year.

Better be late, than never. It might still be possible to introduce some of the suggestions or at least soak up the nuances. At any rate, as an outside onlooker, what are the priorities and issues at hand at this point of time in the run up to the union budget. This is important because the unit budget is the most influential instrument which leaves its imprint on the functioning of an economy during the financial year and, maybe, for longer.

No doubt the top priority for the forthcoming budget would be the fiscal situation following the covid crisis. It has imposed an unprecedented burden on the government and its finances. A slew of stimulus measures and sheer support for the weakest and most vulnerable had to be launched. Income support for the poorest, augmented work schemes under MNREGA, special steps for farmers have all been undertaken which have cost money.

At the end of November last year, fiscal deficit had touched nearly Rs 11 lakh crore that is a surge of 135 per cent of the budget estimates. This will possibly drive the deficit to just over double the budget estimate of 3.5 per cent of GDP. But that is no surprise and the expenditure would have gone to help those who were hit the hardest and also kept the economy moving amidst the worst crisis in a hundred years.

The issue would be should the government now aim for a quick course of fiscal correction. The best way to fiscal consolidation in the current context should be through growth and not an attempt at expenditure compression or effort to raise revenues. That is the expansionary drive should be kept in place, leaving fiscal consolidation during a better time.

Fortunately, we are already in a recovery stream for all it appears. Some recovery would be automatic, since a forced lock-down had brought large swathes of the economy to a grinding halt. Since the Indian economy is a good part informal, these activities would recover the moment the stringency of a lock-down diminishes. In fact, on the ground this seems to have started happening already. The SMEs, the self-employed, the huge army of the tiny units are back humming with activity.

These sectors and activities had suffered a triple whammy so to say. Starting from demonetisation, through introduction of the GST system and in quick succession the painful spread of the diseases had hurt these people the most. So now, nothing should be done to hurt them further. And any attempt at fiscal compression and tapering of the support measures would affect them most.

There is not much need for an immediate fiscal correction though stringency either. Already, the recovering level of activity has been reflected in some improvement of revenue collections.

As the RBI governor has stated at this point of time we should “nurture” the recovery process beyond only meeting the pent-up demand and create conditions for “sustained high-quality growth”. The shallower contraction of the GDP in the second quarter sets the tone the trend next quarters and hopeful the economy should start showing some growth by the middle of the current year.

Some of the high-frequency data suggests that sectors are improving currently.

The Reserve Bank has pointed out the recovery in manufacturing and services purchasing managers’ index (PMI) at 56.3 and 53.7 respectively in November 2020 which indicate expansion in these sectors. Taking February as the base, production of passenger cars, two wheelers and tractors have recovered at above the February levels by the end of November.

High frequency indicators of services showed stability and increase in the number of upticks. Rail freight movements have just about recovered to pre-lock down period as well as toll collections. Domestic air passenger movements have of course remained depressed below the February level.

The RBI indices significantly show no impact of covid shut down on certain segments of the financial system. Apart from a little shock drop in April and May, outstanding credit, bank deposits, LIC premiums, life insurance payments, M3 and reserve money have all along been higher than the pre-covid levels.

Where the financial system was badly hit was in the corporate sector fund mobilisation from the financial markets. These had slumped immediately after the initial lock-downs and have yet to really recover. In fact, these might take much longer till the companies have overcome their debt over-hang.

Secondly, the mutual funds investments in the equities markets had also received a shock drop which have not been recovered. Corporate bond issues and mobilisation of debt from internal markets had also suffered and have yet to recover.

These point at some kind of hand holding for the larger corporates at least for a while. So any major changes in the corporate tax structure or indirect taxation should be unwelcome for the growth process at this point of time.

Two concerns are there.

First is the threat of prices rising too fast. Inflation rate has shown a quick step-up in recent months. Already headline inflation is well above RBI inflation targeting band. Even if, RBI does not embark on a inflation targeting policy immediately, the central bank’s hands will be restricted in introducing growth inducing moves.

The other concern might be the sustained inward flow of funds from overseas. These will have two major consequences. One, it will further aggravate the price pressure unless the funds are sterilised. The other is that the exchange rate would be under upward pressure. It will be of prime importance to keep the rupee exchange rate from appreciating now when the global market is facing fierce competition and trade volume is not rising much.

The budget therefore will have to pirouette around these conflicting demands. But the principal objective should be to keep the growth pot boiling. (IPA Service)