A quiver of arrows Union Budget 2020-21 February 2020
Contents The big picture 2 Fiscal arithmetic 6 Outlook for fiscal 2021 12 Capital market 14 Sectoral impact 15 Agriculture and allied sectors 15 Banking & financial services 17 Consumption 18 Infrastructure 21 MSMEs 23 Crude oil and refining 24 Power and renewable energy 25 Telecom services 26 Annexure 27
2 The big picture India is facing its worst economic slowdown in years. Consumption and investment have stopped firing. The first advance estimates for fiscal 2020 pegs gross domestic product (GDP) growth at an 11-year low of 5%, down from 6.1% in fiscal 2019. Nominal growth estimate is at a weak 7.5% for fiscal 2020. If that sounds bad, financial sector stress has been looping into real sector weakness, dragging down growth some more. The external front has landed the domestic economy a few blows, too: slower global growth, falling trade intensity, and uncertainties from trade and geopolitical conflicts. What makes this ‘shrinking’ feeling stranger and last longer is the long -overdue financial sector clean-up, at a time when the economy is suffering from other ailments. To be sure, monetary policy has done its bit, but with moderate and slow success. The Reserve Bank of India (RBI) cut the repo rate cumulatively by 135 basis points (bps) through calendar 2019, but lending rates tarried with just ~50-bps decline. Even as credit demand has fallen, risk aversion and weak sentiment have affected the willingness to supply credit, too. So, with the burden of hauling the economy out of the hole falling squarely on the government and fiscal policy – even if its hands are tied – everyone was looking to Union Budget 2020-21 to read directions for a revival. How has it delivered? Fiscal deficit stretched to fund capex and spending mildly supportive of growth The budget sets the fiscal deficit target for fiscal 2021 at 3.5%, higher than the previous target of 3.0%. The additional fiscal space is to be funded by aggressive disinvestment, asset monetisation and telecom revenue targets, optimistic tax-buoyancy assumptions and some tightening in overall expenditure. But the space so created is being used to fund capital expenditure (capex) and rural sector spending that support consumption. The relaxation in target to nudge up growth was inevitable, and, simply, more realistic. With this budget, fiscal policy appears to be doing its bit. But fiscal pressures have also intensified in the past two years, leaving the government with limited ability to stimulate growth. There is some support to growth, but nothing substantial in the short term. However, the government is still eyeing the long term and has, therefore, pushed capex. The multiplier impact of this will be positive but lagged. In the absence of growth kickers, growth pick-up in fiscal 2021 is expected to be largely led by the base effect and supported by somewhat better farm income (led by a good rabi crop) and the delayed impact of monetary easing. Critical to this forecast is the assumption of a normal monsoon in calendar 2020 and benign global crude oil prices.
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