ECONOMY

Budget should focus more on boosting demand; sharp fiscal consolidation to hit recovery

A Wall Street brokerage has warned that any sudden and sharp fiscal consolidation steps in the upcoming Union Budget can throttle nascent and uneven recovery of the Indian economy. It has suggested that the Budget should instead focus on boosting overall demand, from rural consumption in particular, and invest more in infrastructure. 


The successive waves of the pandemic have made it more difficult to reduce government debt as a share of GDP in the medium-term, Goldman Sachs has said in a pre-Budget note. It has thus pencilled in a gradual fiscal consolidation, with FY23 falling by 50 basis points to 6.3 per cent from 6.8 per cent in FY22, and set a target of bringing it down to 4.5 per cent by FY26, the report has noted.


The brokerage believes that even though allocation for COVID-related expenses will come down, the government will have to continue to focus on welfare spending and also increase capex by 12 per cent. 


But the higher spending will most likely be financed by higher tax revenue in FY23 and deferred asset sales from the current year, helping reduce the deficit. 


It also sees the general government fiscal deficit falling to 9.3 per cent of GDP in FY23 from 10.1 per cent in FY22 on the back of stronger nominal GDP growth. 


If the Budget removes Capital Gains Tax and withholding tax on foreign bond investments in the country, India will likely be included in the global bond index by Q4 of 2022, and this can help the country attract additional $30 billion inflows in 2023, which again will lead to lower deficit, the report has said. 

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