InvestorQ : As the government goes into Budget 2020, what is it that it needs to specifically remember about the fiscal deficit levels that it will announce?
Rashi Mehra made post

As the government goes into Budget 2020, what is it that it needs to specifically remember about the fiscal deficit levels that it will announce?

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sarah Leo answered.
1 year ago
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Lesson number 1 is that the budget must be transparent and honest about the real fiscal deficit. The good news is that (really) no economist, policy maker or even CEO of an Indian company believes that the government would be able to hold 3.3% fiscal deficit in 2019-20. Some leeway is bound to be there in a year when outlays are growing and inflows have been tepid. There are two key things for Nirmala Sitharaman to remember when she presents the fiscal deficit figure in the budget speech.

Firstly, it will certainly pay to stay within the leeway offered. This year the government may not have much of a choice but to offer a counter cyclical approach to growth. It will have to give some leeway on the fiscal deficit front to propel growth but the question is how much? Ideally, the government should stick to the limits prescribed by the NK Singh Committee which permits a maximum deviation of 50 bps in an exceptional year. If the government can hold the fiscal deficit at less than 3.8%, it will be seen as a positive move.

Secondly, more than the fiscal deficit percentage, the focus will be on where the money is actually going? Markets will be more interested in the way the higher outlay is being spent. A boost to spending or to infrastructure will be viewed as positive since they have strong externalities. However, if the higher outlays are going towards bigger interest payouts and higher running expenses, it is not a great sign. Cutting investments in primary health and education to cut the fiscal deficit is never a good sign for Indian economy where basic services are still poor.

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