
With signs of a slowdown in the economy getting more pronounced, Union Finance Minister Nirmala Sitharaman, who will be presenting the Union Budget on 1 February, has her work cut out.
The Budget must not only address the weary private investment scenario in the country but also address the consumption slowdown. The Union government prides itself on being fiscally prudent, and it has proven time and again its resolve to stay on course of fiscal consolidation. However, desperate times need desperate measures.
The economic growth is slowing, with GDP likely to grow at less than 7 percent for at least the next three years, including the current one. The anaemic growth of the economy has already led to moderation in consumption - a trend that has been on the show for a couple of years.
Rural consumption seems to have picked up, but urban consumption has been hit hard by high inflation and lower credit offtake.
The Central bank has consciously put a leash on consumption-related lending as it sees it as an area of concern. With inflation continuing to remain high, the Reserve Bank of India has been holding interest rates at higher levels, further discouraging borrowers from taking loans for discretionary consumption.
All these factors have weighed down on corporate India, which has been slow in announcing new projects and investments. This shows in lower private investment numbers. As a result, the economy is now facing a vicious cycle, which the Budget can break.
So, when the finance minister and her North Block colleagues sit down to finalise the budget proposals, they must remember that the government can no longer afford a fiscally very tight budget.
The government will have to loosen its purse strings a bit, let the people have more money in their hands, and give some more sops to corporations to prod them into investing. How it achieves these goals would depend on how the government sees the current situation.
For the last few years, the government has been spending liberally on capex, and it sees it as a sure-shot way of lifting the economy. Things appear to be different this time. High government spending on infra has shown limitations in addressing the two elephants in the room – slow private consumption and investment growth.