Rainy days: Fiscal constraints expected to outweigh growth concerns

Mumbai: Come July 5 and India Inc's clamour for stimulus measures to boost consumption growth might just fall on deaf ears as Finance Minister Nirmala Sitharaman is expected to rather tighten the government's purse strings in the upcoming full-Budget 2019-20 than adhere to the industry's concerns.

Industry watchers and economists expect Sitharaman to pay heed to fiscal disciple in her first budget as the Union Finance Minister. The interim budget, had projected the deficit at 3.4 per cent of the GDP for FY20.

Conversely, India Inc wants solid measures coupled with broad policy reforms to rejuvenate the slacking economic growth besides creating jobs.

In 2019, India's economy is reeling under a consumption slowdown owing to farm distress, stagnant wages and high interest cost. It has also been hit hard by below-average rainfall season, till now.

Consequently, a slowdown has gripped sectors such as automobile, FMCG, construction, jewellery and aviation with dealers having to stock higher than usual levels of inventory.

Specifically, the slowdown has impacted the automobile sector the hardest and a weak Monsoon might just accentuate this trend. In terms of figures, the off-take data for May showed that domestic passenger car sales were down 26.03 per cent to 147,546 units.

"The government is expected to play a fine balancing act in terms of heeding to the request from the auto sector for a stimulus in the form of a reduction in GST as these measures could impact its efforts to maintain the fiscal deficit target," Grant Thornton India Partner Sridhar V.

"A struggling sector would however need this push either through tax reduction in the form of GST or leaving more money in the hands of consumer through further rationalisation of income tax."

However, any stimulus measure is unlikely given the high possibility of lower tax collection due to an already existing slowdown.

"The government does not have much revenue leeway to increase the expenditure space in absolute terms over and above the interim one," Edelweiss Securities Lead Economist Madhavi Arora told IANS.

"A slippage may happen (from FY20BE in interim) even if they don't increase expenditure substantially. The revenue target looks too optimistic."

The lack of a stimulus or a major upswing in government's capex will also hamper revival in private investment, aggravate farm distress and make bankers more reluctant to lend.

"With few expenditure allocations expected to be altered from the interim budget estimates, the upcoming budget for 2019-20 is unlikely to reveal the revised priorities of the new government," ICRA's Principal Economist Aditi Nayar said.

"Since the revenue growth assumptions in the FY2020 IBE appear optimistic in light of the FY2019 Prov., there is a possibility of a downward revision in the targeted level of tax revenues in the upcoming budget, which would likely result an increase in the targeted fiscal deficit relative to the FY2020 IBE."

To put it simply, based on the current trend in GDP and tax revenue growth, it will be an uphill task for the government to adhere to its FY20's fiscal deficit target without squeezing expenditure.

"Although, inflation and current account deficit are less of an issue in 2019 than in 2014, accelerating GDP growth and fiscal deficit continues to be a challenge for the government," Sunil Kumar Sinha, Director -- Public Finance and Principal Economist India Ratings and Research (Fitch Group), told IANS.

"The new government must focus on reducing tax disputes and increasing tax compliance besides ironing out the remaining glitches in the current GST regime," Sinha said.

This will be first full-Budget after the NDA won a decisive second term. Scheduled wise, the Economic Survey 2018-19 will be tabled in Parliament on Thursday, July 4, followed by the Union Budget on July 5.