Budget 2021 needs to restore millions of lost jobs to boost demand

 India’s Finance Minister Nirmala Sitharaman has described her upcoming budget as unlike anything seen in the last 100 years.

When she presents it on Feb. 1, Sitharaman will not only aim to repair battered government finances and ensure demand recovers in an economy facing its worst contraction since 1952, she must also revive declining revenue and restore millions of jobs lost during the pandemic. That will be crucial to boosting consumer sentiment in a country where local demand contributes nearly 60% of gross domestic product.

“The virus has led to a demand shock and the budget might need to focus on that,” said Bank of America economist Indranil Sen Gupta, pointing to in-house surveys that showed 19% of respondents were laid off during the pandemic. Demand has to be created either through cutting taxes on fuels or providing income support and spending on infrastructure projects, he said.

Prime Minister Narendra Modi’s government has been parsimonious in pump-priming the economy, for fear of a rating downgrade to junk, and may find that kicking the can down the road is no longer an option. With the central bank halting monetary easing since mid-2020, citing high inflation, the onus is on Sitharaman to loosen the budget despite having meager resources to work with.

The fiscal cost of steps announced so far account for less than 2% of GDP, and compares to direct spending of roughly 3% on average in other emerging markets, according to S&P Global Ratings.

Analysts believe that tax cuts, higher capital expenditure and greater spending on infrastructure projects -- which tend to support low-income earners -- hold the key to unlocking demand for goods and services.

Read More : Budget 2021