Focus must now be on relentless implementation of the reforms announced in the Interim Budget

The Interim Budget should spur consumption that, in turn, would impel the private investment cycle.

After three years of prudence, the NDA government slipped on the fiscal deficit target in fiscal 2018, and then again in 2019. For fiscal 2020, in the Interim Budget, it has pencilled in fiscal deficit at 3.4% of GDP, or 30 basis points (bps) more than envisaged under the Fiscal Responsibility and Budget Management (FRBM) Act.

No surprise there, because persuasions of a battle of hustings typically preclude fiscal rectitude.

In the milieu, the Interim Budget’s focus on rural India and agriculture was expected. The pension and personal tax proposals come as the icing. This should push up consumption, especially in the social strata that has a higher propensity to consume, and in the process, animate a slothful private-sector investment cycle. That is important because the government, which gamely drove investments in the past couple of years, will have to take a back seat with the fiscal slippage showing.

What will be helpful here is that capacity utilisation has ticked up and the corporate deleveraging cycle is progressing well. The Interim Budget also promises to leave more money in hinterland hands. The PM Kisan scheme alone could inject ₹95,000 crore into the farm economy in the current and next fiscals. CRISIL estimates this would boost profit from farming by 22%. Add the impact of proposed interventions on insurance, credit and calamity relief, interest subvention on animal husbandry and fisheries, and agriculture, the economy already looks reassuring.

Tax rebate

Then, there is something for the middle class, too. The tax rebates for those earning up to ₹5 lakh, the ₹10,000 increase in standard deduction, and the hike in the TDS threshold on interest earned on deposits up to ₹40,000 are also consumption triggers. The focus should now be on relentless implementation of announced reforms by getting the State machinery moving at full tilt.

Sectorally, the consumption boosting measures augur well for low-value consumer durables, fast-moving consumer goods and select automobile segments. Sales of mobile phones, smaller-sized television sets and entry-level two-wheelers should be positively impacted. Higher rural income will also spur demand for packaged food items such as biscuits and bakery products.

Focus on road building under National Highway Authority of India and Pradhan Mantri Gram Sadak Yojana will spur demand for commercial vehicles and tractors, respectively. Construction of roads has payoffs as it is highly labour-intensive and in addition to job creation, is productivity-enhancing.

Without doubt, consumption would be on a firm stead if these measures are pursued in the post-election budget as well. As the Finance Minister indicated, the Budget is best read in the context of India’s development journey.

So what does all this mean for India’s growth next fiscal?

Coming after two years of slowing private consumption, continuing sluggish rural demand and wage growth — both on and off the farm — the measures in the Interim Budget can help re-invoke demand from middle and lower strata. That would be opportune because the global economy is witnessing weak and asynchronous growth, with risks tilted to the downside. Export growth, which had made a comeback in 2018, faces risks of weakening global trade growth owing to escalating trade wars, this year.

Next fiscal, therefore, India’s growth will have to be driven largely domestically. At this juncture, India needs good luck on crude oil and monsoons as well as relentless execution of budgetary proposals to fire growth.

Private consumption, which accounts for over 55% of GDP, can be that domestic driver. If the monsoon turns out to be adequate for the fourth straight season, and crude oil prices remain leashed as now, India’s GDP could grow at 7.3% in fiscal 2020.

With higher growth comes higher inflation. Higher demand will maintain the pressure on core inflation which continues to hover around 5.5%. Food inflation too is expected to move up from a very weak base of fiscal 2019 as global food prices move up and efforts to improve the realisations of farmers bear fruit. CRISIL estimates indicate inflation could move up from 3.7% in fiscal 2019 to 4.5% in fiscal 2020.

The focus of the full Budget in June-July next, irrespective of political outcome, needs to be generously on the lower- and lower-middle income strata. The next leg of growth can then be materially inclusive and therefore more sustainable.

Bharat deserves that.

(The writer is the MD and CEO of CRISIL Ltd.)