The interim Union Budget is due to be presented by Finance Minister Nirmala Sitharaman on February 1st. It can be simplified to illustrate the role of fiscal policy in raising a family’s standard of living and ensuring a better future.
The interim Union Budget, due to be presented by Finance Minister Nirmala Sitharaman on February 1st, can provide insight into growth drivers for entire nations and help understand the importance of the right policies for development. For example,Mr Sharma who has a manufacturing business, borrows money to invest in a second machine to increase output.. He and his family could raise their standard of living and ensure a better future for themselves by also up-skilling themselves. These strategies can improve the family’s income levels and standards of living in a sustainable manner.
However, the Sharmas could also take a consumer loan from a bank and live beyond their means, spending lavishly on holidays or a new luxury car. This which will increase the family’s debt burden over time, which will eventually have to be paid back and will therefore eat into future income. This concept of fiscal policy, basically the balance between a government’s income and expenditure, is relevant. Much the same way as a family must keep a balance between income and expenditure, governments must also do so, particularly over the long term.
The dynamics of these factors together, especially when it comes to fiscal policy, can be seen as a key role in increasing the capital stock of an economy. The past few Union Budgets in India have focused on creating infrastructure assets through fiscal expansion and creating a more business-friendly environment by cutting corporate tax rates to be in line with Asian peers. While some were sceptical about this approach, it has played out quite well and has helped support economic growth.
Today, given the success in the execution of the past few years’ budgets (total tax revenues to GDP are near all-time highs at close to 12%) and with ominous clouds forming on the western horizon, a more conservative turn in fiscal policy, with better execution, is warranted in the upcoming interim Union Budget and beyond. On the revenue side, disinvestment remains a large untapped opportunity, and with the buoyancy of the equity market currently, much more can be done now. On the expenditure side, the hard-fought progress that has been made regarding the quality of fiscal spending must continue despite the temptations of this being an election year.
The reason for a more cautious budgetary stance is that investors, both domestic and foreign, disfavour lax policies and this can have a damaging impact on market variables, including interest rates on government bonds. This has never been more important than it is now with foreign bond fund managers looking closely at India due to the imminent entry of Indian government bonds into global bond benchmarks starting this summer.
Much like roof mending should be done when the sun is shining and before it rains, this is also a time to double down on the proper execution of other policies focusing on digitisation, liberalization of the financial services sector, and urbanisation.
Conclusion
The interim Union Budget presented by the Finance Minister on February 1st can provide insight into growth drivers for nations and the importance of the right policies for development. Fiscal policy, which balances a government’s income and expenditure, is crucial for increasing the capital stock of an economy. Given the success of the past few years’ budgets, a more conservative turn in fiscal policy is warranted in the upcoming interim Union Budget and beyond.
