Union Budget may give growth priority

Finance Minister Nirmala Sitharaman may decide to put more money in the hands of common man to restart slowing demand for goods and services. PTI FILE

India’s slowing economic growth and global headwinds — trade war and US-Iran tensions — may force Nirmala Sitharaman to let go of finance ministers’ obsessive concern about the fiscal deficit when she presents the Union budget on July 5.

The finance minister may instead decide to put more money in the hands of the common man to restart slowing demand for goods and services.

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“The finance minister may breach the target of 3.4% fiscal deficit in 2019-20 to give economic growth a priority. She may settle for 3.6% fiscal deficit or even a little higher,” informed sources told DH.

The fiscal deficit is the difference between total revenue and total expenditure. A high fiscal deficit impacts private investment, household savings, stoke inflation and dampens growth. But, when the economy is not firing on all cylinders, a little dose of this deficit is needed to boost growth.

The deficit is financed through domestic borrowing, foreign borrowing or by printing money. While domestic borrowing can raise the interest rate, foreign debt can impact the balance of payment. And printing money can stoke inflation.

India is now grappling with its worst economic slowdown in the past five years, with investment by private companies and consumer demand almost muted.

Savings are at a multi-year low. The government, however, wants to make it a $5 trillion economy by 2024. For that, it needs people to spend and companies to invest and create jobs.

Even independent economists and brokerages like Elara Capital and Anand Rathi estimated the fiscal deficit target for 2019-20 to go up to 3.6% of the GDP in order to lend robustness to the economy.

Sitharaman could give growth priority as intensifying US-Iran tensions and trade war have the potential to add to India’s slowing GDP. Another fear is that a US-Iran war could make crude oil costlier for the country, which imports 85% of its total consumption. Persistent trade war, which usually turns into a currency war, could hit exports.

A Reserve Bank of India estimate suggests every $10 increase in the price of a barrel of crude widens India’s current-account deficit by about 0.4% of gross domestic product. It also stokes inflation by roughly about 49 basis points and raises the fiscal deficit by about 43 bps if the government decides to absorb entire crude price shock and does not pass it on to consumers.

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