Less than a month from now the new Finance Minister, Ms.Nirmala Sitharaman, will present the first budget of the reelected government. Her challenge is to combine a sense of continuity with a promise of change to meet the high expectations aroused by the election campaign. But at the present stage this should be subordinated to the need to give an appropriate tonic to  an economy that is showing signs of illness.

The  litany of economic woes that she has to take into account is long and includes:

• A steady decline in the growth rate of GDP which has come down to 5.8% in the Jan-Mar quarter of 2018-19
• Fiscal pressures because of a large shortfall in tax collections leading to a real  deficit of over 4% of GDP in 2018-19 disguised by transferring an unprecedented volume of expenditure to this, the following financial year
• Major problems in non-banking financial companies with risks of default and serious fraud charges that will put off investors and dry up flows to borrowers
• Continuing balance sheet problems in the corporate sector with a quarter of large companies preoccupied with deleveraging and survival.
• Small and medium enterprises facing difficult credit conditions.
• Continuing concerns about the slow pace of job creation and farmer distress
• A global economy threatened by the confrontation between the USA and Iran, the USA and China and the slowdown in the prime drivers of global growth

However the first budget of a new Finance Minister and a newly elected government cannot be just a repair job. Words and tone matter and the FM must use fully the communication skills she demonstrated when she was a party spokesperson. But what is the message she should seek to convey at the present juncture?

The Finance Minister's speech could project the budget as the delivery of promises about infrastructure and welfare spending that figured in the ruling party's election manifesto. This option is not available this year as the recent data on tax collection trends do not leave much room for any big increase in public spending.

She could fulfil a similar political purpose by spelling out details of some of the major reform measures that are part of the manifesto. But that will be difficult as these details require more time to work out than the thirty days  available to her before she presents the budget.

A more standard option would be to focus on fiscal rectitude and the commitment to stay within the short and medium term deficit targets. But that may not be plausible given the fact that the real deficit is running way above the target set in 2018-19 budget and the Interim Budget tax projections look unrealistic.

The economy does face inflation risks because of the possibility of an oil price increase and the impact of a delayed monsoon on food prices. But these are supply-side pressures which should not be met by demand side containment measures like high interest rates or tight deficit control. Hence the recent reduction in interest rates is welcome and will certainly help. But the interest rate cut by itself is not enough. The rate cut must be passed on and the logjam in the capital market needs to be cleared.

The theme of this year’s budget speech should be what the economy badly needs today -a growth booster.  Judging by company reports, the growth in rural demand for fast-moving consumer goods has slowed down. Reported sales figures for automobiles and other durables also suggest a slowdown perhaps because the boost which came from the Seventh Pay Commission bonanza is petering out. The problems of the NBFCs that provided loans for this purpose and for housing may also be part of the reason. The growth in private corporate investment has been slowing down because of the slackening of demand growth and because nearly a quarter of the large corporates are too focused on deleveraging and survival to consider fresh investment. Export growth has also been disappointing. What has kept the overall growth rate going is public spending.

What can the FM do to boost growth and investor sentiment?

She cannot consider a direct fiscal stimulus given recent trends in tax collections. However the budget can help by  policy changes that improve the demand prospects industry. It could aim at bringing new consumers into the aspirational middle class fold perhaps by proposing calibrated indirect tax changes to the GST council. It should include measures to strengthen the links between defence acquisitions and public procurement for high-tech infrastructure (e.g. metro rail) and domestic manufacturers by bringing them in at the design stage. Another area crying out for major reforms is in agricultural marketing and processing. Would she be willing to announce measures that would rescue the dairy, meat exporting and leather industry from the challenge they face from gau rakshaks? The FM should put together a package of micro-economic measures in a growth booster package for organised manufacturing and the informal sector focusing on promoting demand growth and credit flow.

Given the turmoil and confusion in the financial markets, the FM as the controller of institutions that account for 70% of all financial assets will have to deal at length with what she proposes to do,  The budget speech must include reform measures for PSU banks, a commitment to boost PSU bank lending and specific measures to resolve the problems faced by NBFCs. If SEBI has some bright ideas on promoting domestic private equity and venture funds and for boosting IPO options, particularly for start-ups, the FM must find a place for them in her budget.

Reforms to sustain long-term growth and employment potential, improve social security and living conditions can come later after they are more fully worked out. Fiscal prudence should not be forgotten; but it should be the sub-text rather than the dominant theme and must rest on plausible projections of revenues and expenditure. This budget should focus on short-term growth boosters and provide a tonic to strengthen confidence  and investor sentiment.