Way forward

Budget for 2020-21 will be the toughest for Nirmala Sitharaman, more so than any other Finance Minister during the past eight years. With the downturn in economic growth which has unleashed a cascading impact on revenue growth and widened fiscal deficit, presenting an appropriate budget to resuscitate growth will be an uphill task for her.

GDP growth has plummeted. As per the IMF forecast, growth would recede to 4.8 per cent in 2019-20, the lowest since 2012-13. Nobel Laureate Abhijit Banerjee has expressed concern for the economy heading for a recession. Job opportunities are in shambles. Lacklustre demand has become a drag on the growth. Against this backdrop, the main task of the Finance Minister will be to revive the demand.

GDP growth has been slipping continuously since the second quarter of 2018-19. Tha nation has been in an uproar, accusing PM Modi of formulating faulty policies. One of them was demonetisation. which halted the investment spree of the Indian private sector. Small scale industries sector, the main source of employment generation, was shattered due to inadequate cash flow. The country has been roiling in jobless growth. Lack of job opportunities, contrary to PM Modi's heightened hope in the pre-2014 election manifesto, has been fueling the negative sentiment around the government.

Export is not a significant component of Indian economy. Eventually, it could offset the damage to the demand. It accounted for 12.2 per cent share of GDP in 2018-19. Export too witnessed slower growth in 2018-19. It increased by only 8.8 per cent in 2018-19, against 10.2 per cent in 2017-18.

Nevertheless, foreign investors were unperturbed. They continued to repose confidence in strong parameters of Indian economy. Foreign investment has made a boom. FDI was spurred by 43.4 per cent in between 2014-15 and 2018-19, from USD 30.9 billion in 2014-15 to USD 44.3 billion in 2018-19. Since the role of foreign investment is not significant, it failed to impart a major compensatory impact on the overall investment in the country.

The dynamism between domestic and foreign investment translates into a new synergy in the landscape of investment. Even the downturn in GDP growth could not damage the foreign investors' zeal to invest. During the first half of 2019, foreign investment was spurred on by 25 per cent. This reflects that foreign investors were unnerved by the contraction in GDP.

The global rating agency, Standard & Poor viewed the downturn as a cyclic phenomenon. It said- "India remains a growth outperformer on a long-term basis…..The current slowdown is largely cyclical and the growth is expected to improve on the basis of an uptick in consumption, stable oil prices and strong monetary policies." IMF's forecast also raised an uproar. But, it also viewed the downswing as temporary phenomenon.

Notwithstanding, BJP's thumping victory in the Lok Sabha election in May 2019 reinforced people's confidence in Modi's ruling. Inspired by the unshaken trust, Modi 2 government took a vow for a new challenge to shift the gear to new strategies and put new strength in Make in India, which lost steam in Modi 1. In its report on "Strategy for New India @75", NITI Aayog. the government think tank decoded new challenges to reboot the Make in India sentiment.

The report targeted the economy to reach USD 4 trillion by 2022-23, from USD 2.7 trillion in 2017-18. It identified that domestic investment was crucial for the growth. To reinvigorate the domestic investment sentiment, the report suggested a big jump in Gross Fixed Capital Formation (GFCF), which was low in Modi -1 period. It recommended that GFCF ratio to GDP should rise from 29 per cent in 2017-18 to 36 per cent in 2022-23. It emphasised that unlike Modi-1 period, government investment should also play a crucial role in boosting domestic investment. In 2016-17, government contribution to GFCF was only 4 per cent to GDP. The ratio should increase to 7 per cent by 2022-23, the report suggested.

There were two areas which were identified to have big potential for government expenditure and boost in GFCF. They are urban housing and infrastructure.

The domestic private sector is the core investor in the country. It accounted for 47 per cent of the total investment in new projects for 2018-19. It declined sharply by 21 per cent in between 2014-15 to 2018-19. Following suit, government investment, such as in infrastructures, slipped drastically. It relied more on the private sector to invest in the areas, which were vacated by the government. It hoped that private investment would be crucial for the success of Make in India. Unfortunately, that hope was dashed.

It was observed that unbalanced investment made between big and small sector caused a loss of job opportunities during Modi-1 period. While big firms poured investment in capital intensive industries, such as automobile, drugs and pharmaceuticals, small firms were decaying. Eventually, labour-intensive industries reeled under low investment.

This landscape of investment strategies means that while foreign investors continued to repose confidence in Modi's investment-friendly leadership, the private sector was reined by suspicion. Even the political row between India and China could not deter Chinese investment, which is a fast-growing engine for foreign investment. Chinese investment increased by over 136 per cent in 2018 over 2017, from USD 165.2 million in 2017 to USD 391.2 million in 2018.

To stimulate investment, NITI Aayog advocated rationalisation of direct tax, such as corporate tax and personal income tax. Accordingly, the Finance Ministry lowered the corporate tax to 22 per cent and 15 per cent, who would not avail any incentive.

NITI Aayog focused on boost in FDI. Besides opening more areas, thrust should be given to the FDIs which contemplate the buy-back arrangement. This will have a collateral impact on the country's exports.

To tide over the sluggish demand, NITI Aayog focused on government's role as a frontrunner. It advocated the enhancement of the public procurement system. This can be leveraged by mega public sector projects, like Bharatmala (the biggest highway project), Sagarmala (the biggest Port project) and Pradhan Mantri Awas Yojana (housing for all).

Summing up, though the present economy is reeling under stress, it has the potential to bounce back in the current year. IMF is of a similar opinion, professing that the economy is in a cyclical gyration.

Views expressed are strictly personal