SINGAPORE – India’s budget for the fiscal year starting April 1 may increase growth by over 8% in the next two years, according to Krishnamurthy Subramanian, the country’s top economic adviser.
Finance Minister Nirmala Sitharaman on Monday announced a budget that emphasized capital spending and focused on health and infrastructure spending, as well as some financial sector reforms.
The budget has given a “significant boost” to India’s V-shaped economic recovery, Subramanian told CNBC’s “Street Signs Asia” on Tuesday.
The announced moves “have the potential to push India into an 8% growth orbit in a couple of years,” he said. Infrastructure spending projected by India for the next fiscal year may add even more to the recovery, while the proposal for more than double health spending is an “important moment” in the country’s history, according to Subramanian .
These measures are expected to “lay the groundwork for India to grow at a very high rate, of 8% in this decade,” Subramanian said.
From survival to rebirth
According to Citi economists, a shift in focus from the growth of revenue spending in the current fiscal year to the growth of capital spending for the next one marks the country’s pivot of a “survival” strategy to a “reactivation,” according to Citi economists.
Barber Ranjit (R) shaves a client’s beard under the flyover in Amritsar on September 22, 2019.
Narinder Nanu | AFP | Getty Images
“The budget has refrained from an immediate explicit stimulus of demand in the hope that spending on supply in (infrastructure) will generate boosts in demand,” economists wrote in a note on Monday.
The capital expenditure proposed by India in the budget increases by 34.5% over a year ago to 5.54 trillion rupees (about $ 80 billion).
Monday’s budget was announced in a context where South Asia’s largest economy is projected to shrink by 7.7% in the current fiscal year. Last year, India fell into a technical recession due to the economic consequences of a long blockade to curb the spread of the coronavirus outbreak.
Transparent budget math
Economists agreed that the budget addressed issues of transparency pending time, reducing spending off the government balance sheet: these are important expenditures that are not normally accounted for in the budget. The government’s fiscal and growth targets also seemed realistic and achievable, they said.
“While this could optically increase the number of reported fiscal deficits, a set of very credible assumptions about revenue and spending should reduce the fear of the fiscal fall during the year,” Citi economists said. “In fact, it seems that budget math is consciously unpromising, leaving more room for delivery.”
Finance Minister Sitharaman said the government deficit target for the next fiscal year would be around 6.8% of GDP, which is below the 9.5% set for the current year which will end on March 31st.
Rini Sen and Sanjay Mathur of ANZ Research said the fiscal arithmetic and macroeconomic assumptions underpinning Monday’s budget are realistic, minimizing the risk of the government moving away from the target. As such, the budget seems “much more affordable than in the past,” they said.
Some doubts remain
While economists generally agreed that the budget focused on ways to revive India’s growth, some said it might not be enough.
According to Kunal Kundu, India’s Société Générale economist, the budget lacked “the audacity of spending needed for immediate impact” to help an economy struggling due to lack of demand and the poor employment opportunities, especially in the informal sector.
He explained in a note that public capital expenditure on roads and railways is less than 1% of the projection of nominal GDP for the next financial year. “For most of the other measures announced, the actual level of public spending will depend on multiple factors, including the development of some public-private partnerships,” as well as whether and how privatization occurs, Kundu said.
He added that the 200 billion rupees earmarked for public sector bank recapitalization may not be enough in an environment where many lenders are expected to face asset quality problems; as a result, the growth of bank credit can be successful just as the economy recovers.
However, the announced policies can stimulate gradual growth in the medium term if implemented correctly, according to Kundu.
According to the media, the rating agency Moody’s also expressed doubts about India’s ability to achieve disinvestment targets and higher revenues assumed in the budget.