Preview: 2019 Budget likely to focus on increasing spending, addressing unemployment

Finance Minister Nirmala Sitharaman will present the first Union Budget of the new government on Friday, following the Lok Sabha elections. Former Finance Minister Piyush Goyal had presented an Interim Budget in February, two months before the General Elections began.

Unemployment and growth

The biggest problem the government has to tackle is the lack of jobs. On May 31, the day Sitharaman took over as finance minister, the government released a report which confirmed that India’s unemployment rate had touched a 45-year high. The government had allegedly suppressed the National Sample Survey Organisation report before the elections, inviting anger from the Opposition.

Another matter of concern is the fall in India’s Gross Domestic Product growth rate. The growth rate for the last quarter of the 2018-’19 financial year stood at 5.8%. This means that China has taken back its tag of fastest growing economy in the world from India.

Fiscal deficit

India’s fiscal deficit stood at 3.39% of GDP in the 2018-’19 financial year, in line with the government’s revised target of 3.4%. Sitharaman will attempt to keep the fiscal deficit in check while allowing for implementation of the Narendra Modi-led government’s welfare measures.

Sitharaman will have to present a reasonable estimate of the fiscal deficit target for 2019-’20. A poll of over 45 economists by Reuters showed that the Ministry of Finance may fix the target around 3.5% for the remainder of the 2019-’20 year. “Our view is that Sitharaman will announce loosening measures and relax the deficit targets for this year and next,” Shilan Shah, senior India economist at Capital Economics, said.

Welfare schemes

The government had in February announced a mega pension scheme for workers in the unorganised sector in the interim Budget. The Pradhan Mantri Shram Yogi Maandhan Yojana will cover workers with a monthly income of up to Rs 15,000. Workers who enrol for the scheme will get Rs 3,000 per month after the age of 60. Prime Minister Narendra Modi launched the scheme in Ahmedabad in March.

The Centre has also promised income support for farmers with small landholdings through a scheme that will cost Rs 75,000 crore. Under the PM-KISAN Yojana, farmers with land up to two hectares will get Rs 6,000 per year in their bank accounts in three equal instalments.

The interim Budget also promised to double the income tax exemption limit up to Rs 5 lakh.

The Reserve Bank of India said on June 29 that India’s Current Account Deficit widened to 2.1% of GDP in 2018-’19 from 1.8% in 2017-’18, due to an increase in the trade deficit. The budget may attempt measures to correct this imbalance.

RBI Governor Shaktikanta Das had said on June 22 that there was clear evidence of the Indian economy losing traction. Das said there is a “need for decisive monetary policy action” to promote growth, as the RBI cut interest rates by 25 basis points in its monetary policy meeting. This was seen as the central bank adopting an accommodative stance towards the government.

Increase in spending likely

The Union Budget on Friday is expected to cut taxes for businesses, according to Reuters. The agency said the government may also increase spending to boost consumption growth.

“The focus of the budget will be to boost domestic consumption, address the rural crisis and support small manufacturers,” the Bharatiya Janata Party’s Economic Affairs Spokesperson Gopal Krishna Agarwal told the agency. The focus on addressing the farm crisis may be bolstered by the weather department’s predictions of a weak monsoon, Agarwal said.

A modest increase in the defence budget is expected, Reuters reported. This is despite Sitharaman being a former defence minister, and reports in February suggesting that the raise in the defence allocation in the interim Budget was not enough to even fund the payments the forces have already committed to make in 2019-’20. The government had allocated Rs 4.31 lakh crore in the interim Budget for defence.

A modest increase in defence spending will again put India’s military modernisation plans on hold. “Defence is our major spending and we give it as much as the budget allows,” an unidentified finance ministry official told the agency. “But this year, a significant rise to what has already been allotted looks difficult.”