Government spending on health care, expected infrastructure

SINGAPORE – India’s finance minister, Nirmala Sitharaman, will present the country’s annual budget for the new fiscal year, which begins on April 1, on Monday.

The growth prospects for South Asia’s largest economy remain fragile.

After sinking into a technical recession last year due to a long blockage to slow the spread of the coronavirus outbreak, economic data show some signs of an ongoing recovery. But India’s statistics ministry said last month that advanced data indicated that the economy was still down 7.7% for the current fiscal year.

The future budget “will have to go with a tight rope, balancing the path to consolidation, but not at the expense of restoring growth,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank’s Asia & Oceania treasury department. . a Friday ticket.

The government faces increasing challenges, while the risks of a second wave of coronavirus persist. This includes replacing the millions of jobs lost during the national blockade between the end of March and May, as well as farmers protesting against agricultural reform laws. India will also have to deal with its fiscal deficit, which has exceeded the target due to the economic slowdown.

The future budget will give priority to social welfare to address the economic consequences of Covid-19 and its impact on millions of Indians and to find ways to get growth back on track. Economists expect the budget to cover areas such as health care, housing, employment, infrastructure spending, and the allocation of resources for mass vaccination in India.

The future budget will be dictated by economic changes due to the pandemic, according to Radhika Rao, an economist at DBS Group in Singapore. She explained that India will probably go for a K-shaped recovery, where some parts of the economy will grow, while other areas will lag behind.

1. Health care

India expects to increase spending on improving health care infrastructure, which has struggled to cope with the coronavirus pandemic. Last year, reports said that many hot spots of infection, including New Delhi, did not have enough ICU beds for Covid-19 patients.

In January, India also launched a mass immunization program aimed at inoculating 300 million people in its first stage, most of them front-line workers and those over the age of 50 or in groups. high risk.

“In addition to allocating allocations to the vaccination program (0.2-0.5% of GDP, depending on how many are supported by the state), an impetus for expanding the national insurance system, strengthening the welfare structure and accelerating infrastructure force, ie hospital beds and doctors to the reports of the population will be a priority, “Rao Group DBS said in an email.

2. Infrastructure

Experts say the Indian government is looking at infrastructure spending as a major way to boost job creation in an economy where millions are struggling to find work and revive growth.

“The new budget will increase funding for roads and railways, although it is likely to be much lower than the 40% increase desired by the Ministry of Roads, Transport and Highways,” said Akhil Bery, a South Asian political risk consultant. Eurasia Group.

“Given the pressure on central and state government finances, the Modi administration will need to encourage more private investment to accelerate the deployment of infrastructure,” Bery said.

In December 2019, India would set an ambitious target of 102 trillion rupees (about $ 1.4 trillion) of infrastructure construction over the next five years. But financing these projects is likely to be a challenge, both for the government and for banks facing strained lending cards.

Bery said he expects the government to set up a bank to help fund port, road and energy projects and combine them with India’s existing infrastructure finance company – he expects the government to provide initial financing and hire foreign investors. .

He added that the defense sector will also see an increase in spending due to ongoing border tensions with China.

3. Housing and employment

India could focus spending on the housing sector, especially in urban areas that could boost low-skilled jobs, Credit Suisse economists said in a report last month. The housing and construction sectors in India require a lot of manpower and provide substantial jobs.

Nilesh Shah, CEO of Kotak Mahindra Asset Management, told CNBC that the budget should provide a tax concession to support the construction and real estate sectors, while providing incentives for industries that have been severely affected by Covid-19, such as hospitality. and retail trade.

“The budget should focus on mobilizing resources by improving tax compliance, connecting drilling and generating money from government assets,” Shah told CNBC via email. He added that it should “reassure investors with ongoing reforms to improve the ease of doing business in India and maintain the path of fiscal prudence.”

In December, tax collections on goods and services in India rose unexpectedly by 11.6% from last year, partly due to increased vigilance over tax evasion, according to local media reports.

Rao of the DBS group said he expects the budget to increase allocations for existing employment schemes and programs to boost employment, as well as continue to provide credit guarantee schemes and liquidity support to small and medium-sized enterprises.

Last year, when India announced fiscal stimulus measures, economists were not impressed. Some have said the government has no place to undertake the kind of heavy spending needed to boost the economy. A higher government deficit would have further affected India’s already weakened credit rating.

“Even at the height of the pandemic, the government has been cautious in stepping up discretionary spending and squeezing spending in non-stimulus areas for deficit management,” Priyanka Kishore, head of the Indian and Southeast Asian economy at Oxford Economics, told CNBC.

For the future budget, “India must avoid the trap of a false choice between restoring growth and returning to fiscal consolidation,” wrote Mathanho’s Varathan. “The latter is lost without the former.”

He said any sustainable attempt to reduce the government deficit must be anchored by a feasible and sustainable revenue path that requires India to have strong growth potential. The strategy should be to phase out public spending in a way that “allows the private sector to sustainably raise its weakness against a more uniform recovery,” Varathan said.

Kishore said the global fiscal deficit is expected to fall from 7.4% of GDP in the current fiscal year to about 6% in the next.