The post-demonetisation economic scenario offers scope for an expansionist budget and Arun Jaitley can go for higher fiscal deficit provided the spending is on creation of new assets, jobs and inclusive growth, say experts.
The finance minister is widely expected to give a big push to consumption and investment in his budget that would be unveiled on Wednesday, as the government needs to put the Indian economy back on the growth path.
Jaitley's hands, however, are tied as the expected revenue realisation from the new goods and services tax that would kick in from July is yet to be fully assessed. This effectively stalls the finance minister's scope for introducing an expansionist budget, say analysts.
They add, a policy of fiscal expansion would also mean a reversal of the progressive reduction in both fiscal and revenue deficits achieved so far. But, under the present scenario of a shrunken parallel economy, the government can loosen its purse strings to fuel an expansion of the legitimate economy, say experts.
Increased government spending would boost investment demand and improve business confidence, which has fallen to a new low following demonetisation, they point out.
With consumer spending still very low, companies are shying off from undertaking fresh investments.
Also, while the informal credit system stands crippled with the demonetisation drive, banks are also facing a sluggish demand for loans despite pulled-down interest rates.
It is up to the government to intervene actively in the system to revive both consumption spending and investment demand to fuel growth, they argue.
Economic growth in India mainly came through policy liberalisation, and Jaitley is widely expected to rejig the Manmohan Singh era - the first decade of economic liberalisation from 1994-95 to 1996-97.
Growth came after Manmohan Singh, the then finance minister, allowed fiscal deficit to go up to a high of 7.3 per cent of GDP in 1993-94. This helped economic growth to peak in subsequent years with a significant improvement in tax collections.
Through during 1999 to 2002 India suffered the worst drought in a decade and the global economy was in turmoil following the 9/11 terror attack and the war on Iraq, the then finance minister Yashwant Sinha had enough funds to make big provisions for infrastructure spending.
The fiscal deficit in those years hovered around 6 per cent of GDP, but laid the foundation for a very strong revival of economic growth and a ''shining India'' story. This also helped the economy to withstand the adverse effects of 2007-08 global financial melt-down, say experts.