Moneycontrol Manifesto: Time for Finance Minister to go for broke in Budget 2021

There has been rarely an occasion in independent India’s economic history when the union finance minister would have faced similar conditions in the run-up to the Union Budget.

Last year, when Finance Minister Nirmala Sitharaman presented her second budget, she was broadly confronted with the constraint of turning around a wobbly economy amid tepid household spending and shaky global conditions.

A year later, she may well be looking back at these constraints with a degree of longing. COVID-19 and its spread have left a devastating trail of destruction across the economic landscape, blowing into smithereens the very framework of orthodox fiscal policy planning.

The lockdowns and the prolonged restrictions have forced many a company to shut or curtail operations, lowering the government's tax collections.

Gross domestic product (GDP)—the total value of goods and services produced in the country—fell 23.9 percent in April-June 2020, and then again by 7.5 per cent in July-September.

India has now slipped into a technical recession, which takes place when real or inflation-adjusted GDP contracts in two successive quarters. From being toasted as an engine for global growth with the status of the world’s fastest-growing major economy, India’s GDP has fallen for two successive quarters.

The bigger question now is: how long will the impact last? Will it last for months or for years, if social distancing measures need to be kept in place for protracted periods?

Different industries and sectors, however, have responded differently to the pandemic, with some such as online media, online education and e-commerce thriving during the pandemic.

On the other hand, industries such as travel, and tourism have seen their businesses come to a complete halt. There are signs of softer recovery in these sectors. Domestic travel has just started to inch back. It is not as pessimistic that was earlier feared, though it may take 18-20 months for a full recovery.

One of the surest ways to revive the Indian economy, or any economy for that matter, is to make people spend more. Unlike China, the edifice of India’s growth has been the vast consuming households.

While the middle-class spending is widely evident through visible items such as cars and consumer durables, it is the not-so-well-heeled that actually keeps India’s consumption cycle thriving.

An economy-wide squeeze has made those at the lowest income scale, such as migrant daily wagers and street vendors, the most vulnerable. These are the class of people that need immediate hand-holding.

Expectations are running high on the Budget 2021-22 for “big-bang measures." The Union Budget may just be the right occasion to be a little more courageous and to press the foot on the accelerator.

The bigger question now is: how long will the impact last?

Sitharaman faces a fiscal war that will require her to deploy all the policy arsenal — unorthodox and conventional — to win this fight.

Healthcare budgets will need a sharp push and the government may be forced to offer a series of relief measures in the form of tax breaks to help businesses and individuals stay solvent.

It is just the occasion for finance minister Nirmala Sitharaman to go for broke in her third budget that can potentially serve as the force multiplier for India to rocket back.