Finance minister Nirmala Sitharaman’s second budget will be unveiled in a few days in challenging circumstances. While the slowdown in economic momentum has been evident for more than a year, new challenges have emerged in terms of hardening prices of food articles and fuel. In other words, to the challenge of a pronounced slowdown is the addition of a nascent problem of price rise in some critical items in the consumption basket of the average Indian household. In this backdrop, the escalation of geopolitical tensions in West Asia is bad news for India’s economic policy makers.
Oil prices in the last two months have already shown a sequential increase of almost 10%; the average price of the Indian basket of crude in December was $65.52 a barrel. An uncertain geopolitical scenario poses an additional risk to macroeconomic stability. Separately, the recent increase in food prices is worrisome because of the impact it can have on expectations. In November, food inflation at the retail level was 10.01%, the highest in about six years. There is hardly any space left for conventional fiscal policy tools in tiding over the present set of problems.
The government has over the last few months tried to change sentiments and attract investments. Arguably, the option to switch to a lower corporate tax rate structure was the most consequential measure. By itself, it may not be enough to revive sentiments. What the budget can do is complement recent measures by laying out a roadmap of economic reforms. With its ability to cobble together a parliamentary majority on key legislations, NDA is in a position to initiate deep structural reform. Clear messaging through the platform provided by the budget will be of immense help in reviving sentiments. This opportunity must not be lost.
This piece appeared as an editorial opinion in the print edition of The Times of India.