Reduce fiscal deficit through curtailed subsidy spend

This is a difficult year. We are coming off a structural slowdown that is being masked by a cyclical downturn. Global uncertainties abound. The macro picture on trade, the fiscal deficit, the rupee, etc, are looking poor. The only positive is that inflation is expected to trend down and pull interest rates down. This will provide a boost to the economy, at least in terms of a heightened consumer demand, but the investment cycle will take longer to pick up. Actual investment will also depend on actual reforms across a swathe of sectors, as well as the government’s stated position on boosting growth. This is where the Budget will be keenly watched. Will the finance minister make macroeconomic assumptions that everybody believes are too optimistic?

The macro issues to watch are — (i) assumptions for growth and inflation, hence, nominal growth; (ii) total borrowings; (iii) fiscal deficit and key assumptions underlying this; and (iv) cuts in subsidies. The sentiment-driving measures to watch could be investment-creating ones like investment tax credits or lower borrowing costs for infrastructure; sector-specific measures in power, financial services, renewable energy, etc; genuine privatisation, with strategic sales or higher levels of disinvestment of public assets; FDI-boosting measures, etc.

I think it is likely the finance minister’s effort will take the targeted fiscal deficit down from the likely actual of around 5.5 per cent for this year to around 4.5 per cent next financial year. This will be partly achieved by keeping expenses relatively stable in nominal terms, while the economy expands by 13 to 14 per cent in nominal terms. I would expect GDP growth to settle around seven per cent for the year, with inflation at roughly the same level. I think most policy makers are underestimating the trough that has been created through a lack of investment plans through the current financial year and would end up being too hopeful about a pick-up in economic activity. I do not think this will reverse quickly. Most companies will work to get the existing projects on track before planning new ones.

I would like the FM to reduce the fiscal deficit through a curtailed spending on subsidies, to cut government borrowings through a more active privatisation programme, to foster domestic investment through better decision making in the government, to encourage FDI and to lower expectations for inflation and, thereby, interest rates.

Sumant Sinha
Chairman & CEO, ReNew Power