As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand, it said.
"A strong policy push coupled with some heavy lifting (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by N K Singh) by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase," it said.
The government has announced a slew of measures recently to prop-up the economy, but Ind-Ra believes they will come to aid only in the medium term.
The shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 per cent of GDP (budgeted 3.3 per cent) in FY2020, even after accounting for the surplus transferred by the RBI, it said.
"A continuance of low GDP growth even in FY'21 means subdued tax revenue and limited room for stepping-up expenditure. Ind-Ra believes the government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped," it said.
While rationalising, the focus of expenditure has to be on creating direct employment and putting more money in the pockets of the people at the bottom of the pyramid, it said, adding since their marginal propensity to consume is close to one, they are likely to spend what they receive.
"This will support the consumption demand. Therefore, budgetary allocation to heads such as rural infrastructure, road construction, affordable housing and MNREGA must be prioritised and allocation for non-merit subsidy/expenditure less critical for growth be rationalised," it said.
Also, gross fixed capital formation (GFCF) has become government dependent, as incremental private capex has been down and out, it said, adding, despite the fiscal constraints, the government has not shied away from infrastructure spending in the past and even resorted to fund them through extra budgetary resources.
Ind-Ra, therefore, believes the government will continue to focus on infrastructure spending and leverage all possible options - budget, off budget including National Infrastructure Investment Fund, it said.
Also, since a larger part of the government capex now takes place at the state government level, it will be important to keep a tab on the state government capex as well, it added.
With regard to inflation, it said, retail and wholesale inflation expected to be 3.9 per cent and 1.3 per cent, respectively as compared to 4.4 per cent and 1.4 per cent in the current fiscal.
Though oil prices are stable, retail food inflation after remaining subdued and in single digit for 70 months since January 2014, entered into double digits in November 2019 and accelerated to 14.12 per cent in December 2019, it said.
This means, in the near term, further monetary easing is ruled out and we may have to brace for an extended pause on the policy rate, it added.
While observing that external environment continues to be challenging for exports due to the trade friction and protectionist policy pursued by many developed economies, it said, as a result, exports of goods and services are likely to witness negative growth of 2 per cent the current fiscal.
"With some breakthrough in the US-China trade talks, Ind-Ra expects external environment to improve somewhat in FY21. This is likely to help India's exports of goods and services to grow by 7.2 per cent and the current account deficit to decline marginally to $32.7 billion, 1.1% of GDP in FY21 (FY20: $33.9 billion, 1.2% of GDP)," it said.
In view of these developments, Indian rupee is expected to average 73 against the dollar in FY'21, it said.
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