Business Today
Loading...

Budget 2021: Will FM Sitharaman balance between growth and inflation?

Given the current state of the economy, the report expects Finance Minister Nirmala Sitharaman to announce significant fiscal reforms to bring economy back on track as the RBI may not be in a position to ease policy rates further

twitter-logoBusinessToday.In | February 1, 2021 | Updated 05:54 IST
Budget 2021: Will FM Sitharaman balance between growth and inflation?
In a bid to ensure long-term debt sustainability, the government should also announce debt market reforms

The Union Budget 2021 is being presented at a time when the economy is battling with slowing growth and higher inflation. Inflationary pressures and mounting fiscal deficit could restrict the government from ramping up expenditure outlay to boost the economy. According to a report by consultancy firm Ernst & Young (EY), consumer price inflation (CPI), or retail inflation, is expected to remain elevated in the current calendar year compared to other major economies. Given the current state of the economy, the report expects Finance Minister Nirmala Sitharaman to announce significant fiscal reforms to bring economy back on track as the RBI may not be in a position to ease policy rates further.  

In Budget 2021, the government should announce fiscal measures to lift the economy from the worst economic slowdown since Independence. India's GDP saw massive contraction of 23.9 per cent in the first quarter of the current fiscal in wake of economic disruption caused by coronavirus-led nationwide lockdown. Overall, the economy is expected to contract by 7.7 per cent in the current financial year, as compared to the growth rate of 4.2 per cent in 2019-20, as per the first advanced estimates of the national income released by National Statistical Office (NSO).  

In a bid to ensure long-term debt sustainability, the government should also announce debt market reforms.  

"With CPI [consumer price index] inflation remaining well above the upper threshold of the monetary policy target of 6 per cent, the monetary authorities may not be inclined to reduce further the policy rate from the current level of 4 per cent. As such, in the near future, the policy thrust to support growth may have to come almost entirely from fiscal policy initiatives of which the FY22 union budget may be a key instrument," said DK Srivastava, chief policy advisor at EY India.  

Retail inflation, calculated on the basis of Consumer Price Index (CPI), has been above the RBI's upper bound inflation target of 6 per cent for more than 11 months. However, it has shown some declining trend over the past few months, thanks to decline in vegetable prices.    

In the Monetary Policy Committee (MPC) meeting in December, the RBI Governor Shaktikanta Das projected CPI inflation at 6.8 per cent for December quarter and 5.8 per cent for March quarter of the current fiscal (FY21). For H1 FY22, he said inflation is predicted to hover in the range of 4.6 per cent to 5.2 per cent with risks continuing to be broadly balanced.  Amid concern over elevated inflation, the MPC kept the benchmark interest rates unchanged at 4 per cent maintaining an accommodative stance.    

Rising interest rates are neither good for a reviving economy nor a demand-less market, especially when unemployment rate is high. It would be onus on the government to set ambitious fiscal roadmap as budget proposals will dictate the MPC's next move. While it would be interesting to see what the RBI does in its policy review, scheduled four days after the Union Budget, many economists fear that the inflation trajectory could riddle fiscal plans ready for print. The last bi-monthly monetary policy statement for the current financial year will be held on February 3-5 for the policy review. 

Also Read: Budget 2021: Will COVID-hit aviation sector get a revival package?

Also Read: Budget 2021: Will govt ease restrictions on FDI to boost economy?

  • Print
  • COMMENT
BT-Story-Page-B.gif
A    A   A
close