Representational Image
Representational Image

All stakeholders have great expectations from the upcoming Budget, which could provide a healing touch to the pandemic-battered economy and push growth. Even Finance Minister Nirmala Sitharaman last month promised a ''never before'' like Union Budget to the people of India.

Amid the overwhelming expectations from the Budget 2021 this year, one might wonder how exactly the Union Budget impacts the economy. Indeed, Indian economy is now expected to see a faster turnaround given the impending rollout of vaccine, increased mobility and fewer disruptions to business operations as the economy opens up but a lot will also depend on the upcoming Budget for 2021-22 to steer its course.

The Union Budget impacts the economy in several ways, not least of which are influencing public expenditure and fixing interest rates.

Public expenditure is the amount of money that the government spends on collective needs, including education, healthcare, housing, security, infrastructure, etc.

There are roughly three types of budget, depending upon the relationship between the estimated expenditure to the estimated revenues -- Balanced budget, Surplus budget, and Deficit budget.

By changing the amount invested in choice sectors each year, the Union Budget indirectly influences all other branches of administration of the society, politics, and governance.

For example, by creating a fiscal deficit and deciding upon the means of financing it influences the interest rate, which directly controls the money supply in an economy.

On the other hand, if the interest rate is high, it would mean industries will have to acquire capital at a higher cost of production, which would in turn translate to, provided other variables remain the same, lower profits and turnover.

Moreover, the extent of a company's turnover also influences its stock prices. Lower profits directly equate to lower stock prices. From a macroscopic view, the stock market thus, in a critical moment, awaits the Union Budget every year.

Not just this, the annual Budget also fixes the rate of direct taxes, the increase of which leads to a decrease in disposable income (total income minus amount of all taxes paid).

A decrease in disposable income would in turn lead to a decrease in demand and subsequently, decrease in production and growth.

On the other hand, indirect taxes are also affected by the government's policies in the annual financial budget. Indirect taxes, such as value-added tax (VAT), goods and services tax (GST), and excise duty, tariff, etc are passed on the consumer, increasing the price at every stage.

Higher price would again reduce the profit margins of companies, thus affecting the country's economic growth as a whole.

India's economy had been losing momentum even ahead of the shock delivered by the COVID-19 crisis. The rate of GDP growth sank to a more than ten-year low of 4.2 per cent in 2019, down from 6.1 per cent the previous year.

India, which had in 2019 overtaken the UK to become the fifth-largest economy in the world, was knocked off course somewhat due to the carnage that the pandemic and the ensuing strict lockdown unleashed -- businesses were shut, consumption slumped, investments took a hit and jobs were lost.

The combined effect being that the economy got relegated to the sixth spot in 2020.

The Budget for the next fiscal starting April 2021 that Finance Minister Nirmala Sitharaman will present on February 1 will be the starting point for picking up the pieces after the economic destruction.

(With inputs from agencies)

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