Five ways budget can help India get out of an economic slump

As finance minister Nirmala Sitharaman prepares to present her second budget—this one comes amid projections by the International Monetary Fund of growth slowing to 4.8% in the fiscal—here are five ways in which she can help stimulate the economy:

No reduction in spending for rest of FY20
The government, in its attempt to contain fiscal slippage, must guard against the tendency to squeeze expenditure, especially capex, in the last quarter of the fiscal. While there are some signs of a spending cut already in progress, it could prove counterproductive to its efforts to revive growth.
Boost demand
While the government’s approach so far has been to take supply-side measures it can no longer delay a spending push in the budget in the absence of any credible evidence of revival in private investment. With limited availability of fiscal space and tepid growth in revenue collections, it should carefully choose the sectors to boost public spending, opting for those that have a higher multiplier effect such as rural infrastructure.
Enable investment revival
Private investment-led growth is needed to achieve Prime Minister Narendra Modi’s vision of making India a $5 trillion economy, but this has not materialized so far. Last month, Sitharaman announced a ₹102 trillion investment plan over five years under the National Infrastructure Pipeline (NIP). The projected annual infrastructure investment for FY21 is ₹19.5 trillion. While the Centre and the state government will have an equal share of investment at 39% each, the private sector will contribute 22%. Announcing innovative finance models will be key to drive private sector participation. Structural issues in the economy, including the debt pile-ups in the shadow banking sector, also need to be addressed to boost private investment.
Address income inequality
An Oxfam report last week reaffirmed growing inequality in Asia’s third-largest economy, where the richest 1% controls 42.5% of national wealth. With growing joblessness and shrinking job opportunities for the educated youth, the challenge is to create well-paying jobs and an enhanced social security system to ensure the poor benefit from economic growth. The government may want to look for more progressive taxation; incentivize loans and facilitate ease of doing business for small firms and startups. Reintroduction of the wealth tax, as suggested by Nobel laureate Abhijit Banerjee, is worth considering too.
Allow states to borrow more
The Centre needs the states on its side in its efforts to shore up the economy. States that have faced mounting pressure on their finances have started cutting capital expenditure to try and contain deficits. This could prove detrimental to the Centre’s efforts to revive growth. The Centre must raise the borrowing limits for states, at least for fiscal 2021, to support its own efforts to revive growth. While higher borrowing by both the Centre and states theoretically could crowd out private investment and push up interest rates, that should not be the case in the current scenario when business sentiment is down.

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