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Budget 2020: 'Personal income tax tweak unlikely, focus on rural economy, agriculture'

Though there will be growth upturn, GDP growth rate will stay below 6 percent in FY21.

January 31, 2020 / 05:36 PM IST

With a slowing economy, it is understood that the fiscal deficit target of 3.3 percent for FY20 will not be met and the market expects it to settle in the range of 3.5-3.8 percent, Deepthi Mathew, Economist at Geojit Financial Services, says in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpts:

Q: What are your expectations from the Budget? Do you think it will be a big-bang budget, considering the economic slowdown?

A: It would be a populist budget as the emphasis would be to lift the economy from the current slowdown. Rural economy and agriculture sector will get the major focus, as the revival of rural sector is important to put the Indian economy back to the growth track.

Q: Do you think the growth rate will return to over 6 percent by the end of FY21?


A: The government has announced various measures, including corporate tax cuts, to stimulate the investment demand in the economy. However, the slowdown in consumption acted as a barrier in attracting new investments. Some high-frequency data are showing improvements, but it is too early to say that the economy has entered the revival path. Though there will be growth upturn, GDP growth rate would stay below 6 percent in FY21. The Budget plays a critical role in this aspect.

Q: Do you think the government will meet the fiscal deficit target? If not, what will be a comfortable level for the market?

A: With a slowing economy, it is well factored (in) that the fiscal deficit target of 3.3 percent for FY20 will not be met. The market expects the fiscal deficit to settle in the range of 3.5-3.8 percent. It is also expected that the Budget will witness a move from fiscal prudence to fiscal profligacy, with the fiscal deficit target in a higher range.

Q: Do you expect the RBI to hold rates at the February policy meeting as well? Will it revise its economic growth and inflation forecast for FY21?

A: With the central bank following an inflation-targeting regime, it is likely that the RBI will hold the rates in its February meeting. Food inflation is at elevated levels, and is likely to continue for a few more months. Improvement in core inflation is also expected in the coming months, with the revision in tariff rates by telecom operators and railway fares. In such a scenario, there will be little room for the central bank to cut the rates.

Q: Apart from divestment, what are the other measures that the government will take to manage the fiscal deficit in FY21? Will it lower the divestment target for FY21?

A: In the wake of a slowing economy, government's focus will be to mop up non-tax revenue than tax revenue. Disinvestment target for FY20 is at Rs 1.05 lakh crore. The actual realisation till date is only around Rs 18,000 crore. In this scenario, the government won't go for a higher target in FY21. However, there is a sense of optimism about the sale of Air India, and the government is likely to maintain the target at around Rs 1 lakh crore for FY21.

Asset monetisation will be another focus area of the government to mop up the non-tax revenue.

Similarly, in the wake of Supreme Court judgment on Adjusted Gross Revenue (AGR), the government will be getting Rs 1.47 lakh crore from the telecom operators that could bring in some relief to the exchequer.

Q: What should investors expect from the Budget?

A: The first Budget of NDA-2 was not well received by the market, though corrective steps were taken later. Investors expect changes in the Dividend Distribution Tax (DDT) and the capital gains tax from the Budget.

Q: Will a major tweak in personal income-tax be a game changer?

A: One of the major reasons for the current slowdown is the declining consumption demand in the economy. The RBI's latest survey also shows that consumer confidence is at low levels. An increase in disposable income will help in reviving consumer spending. In this aspect, a cut in tax rate or raising the tax slab could have a positive impact. However, with the limited fiscal space there is little room for the government to go for a tax cut.

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Sunil Shankar Matkar
first published: Jan 31, 2020 11:46 am
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