Finance minister Nirmala Sitharaman should focus on reviving credit growth and consumer spending in the rural areas in the upcoming Union Budget to boost the struggling economy, said Gita Gopinath, chief economist, the International Monetary Fund.
Sitharaman will present the Budget on February 1.
Gopinath had also cited weak credit growth and poor rural consumption as key reasons for lowering India’s GDP growth rate to 4.8 percent in FY20 from 6.1 percent estimated in October 2019.
The IMF economist noted that the Reserve Bank of India’s monetary policy has generated a fair amount of stimulus, which will feed into the system over the next 12 months.
“In terms of priority, it has to be how do you resuscitate credit growth, but at the same time making sure that there is not going to be another non-performing asset problem in the future,” said Gopinath in an interview with CNBC-TV18.
“I think that is the tricky balance that the government have to hit.”
Gopinath further said that policies related to rural income transfers would help much more in reviving consumer demand than income tax relief.
“The policies in terms of transfers to the rural area, rural income transfers those should help much more immediately in terms of consumer spending,” she noted.
“On the fiscal side there was already one major reform that was done which was the corporate tax cut and we think that should affect though, of course, it takes a while, it is not something that happens immediately,” added Gopinath.
It is important for the government to show commitment to fiscal prudence, noted Gopinath. “A comprehensive policy that takes care of fiscal sustainability and meets the budget targets that have been set out by the government is important,” she said.
“If there is spending it would have to be on investments, on infrastructure because those raise outputs and help with the fiscal situation,” added Gopinath.
The IMF expects India’s GDP growth to improve to 5.8 percent in 2020-21 and to 6.5 percent in 2021-22.
Despite the cuts, India will remain the second-fastest-growing major economy this year after China, which is estimated to grow at the rate of 6.1 percent.
