Narendra Modi’s prime ministerial campaign, where he promised to turn the slumping economy around, struck a chord with a nation grappling with a range of fiscal issues. The electorate showed that it has lost its faith in the PM, with a spectacular and unprecedented mandate that brought the Modi government back to power.
After the emphatic victory, the PM did not waste any time in forming the new government. There were some new faces in the government, but one of the most unanticipated changes was the candidate for the position of finance minister.
The PM handed over the Finance Ministry portfolio to Nirmala Sitharaman, a JNU alumnus and a BJP veteran. And all eyes are on her in the lead up to the full Union Budget 2019, which will be presented on 5th July.
India’s first female finance minister faces an unenviable challenge and she will take over from where erstwhile finance minister (FM) Arun Jaitley left off.
Having inherited an economy that is in shambles, the onus is now on her to guide India through the troubled waters and steer it to the bright future promised by the PM during his campaigns. And all of this starts with the full Union Budget of 2019. The new budget will determine how the nation will fare over the next few months.
What makes the task ahead exigent is the possibility that India might witness the worst slowdown in five years.
So, the first thing on her agenda will be giving the economy a kick-start. She must draft a fiscal policy that will reverse a worrisome trend. In the last 4 quarters, the GDP witnessed a steady drop. It now stands at a five-year low of 6.8 %. Economists feel that a gradual fiscal consolidation is a course that the FM will embark upon.
Nirmala Sitharaman has to fulfil PM Modi’s promises of generating more jobs. India’s unemployment rate doubled in the last two years and spiked to 7.6%. It has not been showing a downward curve since 2017. In the age bracket of 20-24 years, the unemployment rate is 32%.
Job creation has slumped by 6.9% and the government has not yet kept its earlier promise of creating 1 crore job opportunities every year. Employment generation is indeed a tough nut to crack because of several factors at play, such as the growth of labour-intensive industries that can draw in a large chunk of the labour force and agricultural displacement.
Hence, more capital will have to be invested to develop the industrial sector and impart trade skills to the youth, so that they can be better absorbed into the workforce.
The FM will possibly be identifying the focus areas such as domestic consumption and government spending, both of which have seen a dip. Unless there is a rise in both, economic activity will dwindle and investment will dip,imparting to a situation that will be cataclysmic for job creation. So there needs to be a stimulus to boost economic growth, which will consequently generate employment and the FM is expected to formulate policies to that effect.
The fiscal deficit is intertwined with growth. It is expected that in the upcoming Union Budget, the FM will peg the fiscal deficit target for the financial year 2019-2020 at 3.4% of the GDP. Two factors might hurt the government’s exchequer. Firstly, the minister will probably be aiming to increase public welfare spending and secondly, tax revenues generation has not exactly been heartening.
Despite this, she is expected to not upset the fiscal deficit status quo.
Credit growth of Public Sector Banks has only just picked up and they will require more capital to continue this trend. To provide wind in their sails, Nirmala Sitharaman will probably be injecting INR 20,000 – INR 30,000 crore into the banks to ensure that they meet the minimum regulatory capital requirement.
This will also be helpful, if the government plans another massive consolidation of public sector banks like it did with the amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda.
The FM’s chief preoccupation will be with taxes. She has been in a slew of meetings with all the stakeholders, the farming and industry representatives. Everybody expects tax sops, so, the challenge lies in not disappointing anyone by giving some benefits to everyone.
Donald Trump set the precedent by slashing the corporate tax rate from 30% to 21%, and India might just take a leaf out the USA’s book. The Confederation of Indian Industry wants taxes to be reduced to 25%, while the Federation of Indian Chambers of Commerce and Industry (FICCI) is of the firm opinion that only tax rates as low as 18% can be conducive to growth.
Industrialists are also clamouring for a reduction in Dividend Distribution Tax from 20% to 10%. So, it will not be far-fetched to hope a revision in the corporate tax structure in the budget.
Farmer bodies too want tax benefits. They have suggested installing more solar panels to generate cheaper and renewable power, incentivising the use of organic manure that can lead to improved soil carbon content, raising investment in micro-irrigation pumps and encouraging start-ups in agriculture as a means to end the rural crisis.
Tax benefits may also penetrate the healthcare system. The FM is expected to increase tax exemption on preventive health check-up to INR 20,000 from the current INR 5,000.
The FCCI also expects that Nirmala Sitharaman may augment medical reimbursement from the current INR 15,000 to INR 20,000. She may also provide subsidies to capital that will go into creating funds to establish more hospitals.
A litmus test awaits our new FM, Nirmala Sitharaman. Steering the economy of a large and rambling country like India, which is replete with challenges and pitfalls, is an arduous task. She has already won hearts by appealing to the nation to pitch in with insights and ideas that can revolutionize our economy. So, we should all stand by her because she has the country’s interests at heart.