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Budget 2019: Factors that might impact future of the economy

If deficits increase, that can lead to inflationary pressure and raising interest rates.

Partha Chatterjee        Last Updated: February 8, 2019  | 17:02 IST
Budget 2019: Factors that might impact future of the economy

While the Union Budget is the annual statement of government finance, the government has often used this platform to announce policies and new welfare schemes. The Budget document gives an insight into the priorities of the government. This year, as such, with the parliamentary elections round the corner, the interest is high. There is no doubt that the government will want the Budget announcements to be well liked and popular among the electorates. There are two things the government can do -- increase government expenditure through certain schemes or cut. It is possible the government will do both to certain extent.  However, in the process there are a few things the government has to keep in mind.

First, I think the government will do good to be cognizant of stability. If deficits increase, that can lead to inflationary pressure and raising interest rates. As it is, India is expected to miss 2018-19 . Any further pressure on that can have both long term and short-term consequences, including fall in investment. In such an environment deficits can spiral out with falling revenues from taxes as well as government's inability to push through the disinvestment goals. This will impact the of the country and the welfare of its residents. 

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Added to that, the external environment can also become more difficult with 's growth rate slowing down and trade wars still unresolved. After decades of unprecedented high growth, China seems to head towards a cooling off in growth rates. This will impact the world demand and can put the global economy at risk. Companies, which have heavily invested in China and had been relying on the expanding demand within China, may face headwinds. They will increasingly look at markets outside China, and India will unquestionably be on their radar. The government must positively take this into account in presenting the . Added to this, we are in the midst of trade wars, particularly between China and . This can take an unpredictable path and will undeniably weigh down the global economy. The temptation for the government might be to follow suit and increase trade barriers in India, particularly because that plays well to the galleries when seen through a nationalistic lens. But, that would be a wrong strategy and will certainly lead to India underperforming, even if India remains the fastest growing major economy. The government will do good to bring down barriers to attract investment and increase trade. This is critical to boost employment. Else, we might lose out to other countries, particularly in South East Asia.

Finally, going back to talk about government expenditure, while there has been a lot of talk about a roll out of universal basic income scheme, I hope the government takes a cautious path. The mechanics, and even the benefits, need to be debated much more vigorously. This has to be seen in the general equilibrium sense, i.e., taking into account the various inter-linkages in the economy. Any hasty decision can weigh down the economy.  Since this will be seen as an entitlement, it will be hard to undo this - so there will be long-term effects. Moreover, a good design of such a programme is an absolute necessity. As we have seen, bad execution of even good ideas can be counterproductive.

Also read: Union Budget 2019: Here's a list of India Inc's expectations

Also read: Budget 2019: What working women should expect

(The writer is Associate Professor and Head, Department of Economics, School of Humanities and Social Sciences (SoHSS), at Shiv Nadar University)

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