Budget sees fiscal deficit falling to 3.5% in 2020-21

Despite a temporary moderation in the Gross Domestic Product (GDP) growth in 2019-20 owing to global headwinds and challenges in the domestic financial sector, Budget 2020-21 says the fundamentals of the Indian economy remain strong and GDP growth is expected to rebound from the first quarter of 2020-21.

The Macro-economic Framework Statement (MFS) 2020-21 says the economy can safely return to the path of fiscal consolidation without compromising the needs of investment out of public funds. The government has revised the fiscal roadmap in the near term and limited the fiscal deficit to 3.8 per cent of the GDP in the revised estimates for 2019-20 and 3.5 per cent in 2020-21, according to the MFS.

Further, the document states that the consumer price inflation has remained within the targeted limits set by the Monetary Policy Committee (MPC) of the RBI and the government is expected to return to the glide path of fiscal consolidation in the medium term.

In her Budget speech, finance minister Nirmala Sitharaman stated that the government has undertaken very significant tax reforms for boosting investments. Also, keeping in mind commitment of the government towards various schemes and the need for improvement in quality of life, level of expenditure has been kept at Rs3,042,000 crore in budget estimate for 2020-21, compared to Rs2,698,000 crore in revised estimates for 2019-20.

The Budget document says global confidence in the Indian economy has improved as reflected in growing inflows of net FDI and an all time high accumulation of foreign exchange reserves of $457.5 billion as of December 2019. India moving up by 14 positions to 63rd rank in World Bank's Ease of Doing Business 2020 Report, has contributed among others to this increased global confidence, the MFS document notes.

Talking about the critical measures announced/implemented by government in 2019-20 to catalyse the rebound of the GDP, the MFS cites hike in MSP of agricultural crops, reduction in corporate tax rate, incentives for start-ups and expansion of MSMEs, recapitalisation of public sector banks, streamlining of many labour laws at the central government level, among others.

To improve the physical quality of life, the government has also announced the National Infrastructure Pipeline (NIP) of projects worth Rs10,200,000 crore, which would commence in phases from 2020-21 to 2024-25.

Describing the strategic priorities for the ensuing year, the MFS states that the main focus of the government on expenditure side will be to enhance creation of capital assets, with water conservation and sanitation to be the focus sectors. On the receipt side, resource mobilisation will be sought through sale of strategic assets, the document adds.

Delving into the challenges facing the economy, the MFS notes that the major challenges for the economy arise from the external front, mainly due to geo-political tensions in the Middle East and rising crude oil prices due to supply disruption which may in turn decelerate growth and increase inflation. Challenges cited on the domestic front are revival of investments and savings.

According to the MFS, positive prospects for the economy are continuation of structural reforms that will revive growth and expected normalisation of credit flow as investment picks up induced by a cut in the corporate tax rate and anticipated transmission of repo rate cuts earlier implemented by the MPC. Global economic growth is expected to pick up in 2020 which could also support India's growth. In view of a positive outlook on economic rebound, the MFS predicts the nominal growth of the economy at 10 per cent in FY 2020-21.