SINGAPORE – India’s budget for the fiscal year beginning April 1 has the potential to increase growth by more than 8% in the next two years, according to Krishnamurthy Subramanian, the country’s chief economic adviser.
Finance Minister Nirmala Sitharaman on Monday announced a budget that focused on capital spending and focused on health and infrastructure spending, as well as financial sector reforms.
The budget has given a “significant boost” to India’s V-shaped economic recovery, CNBC’s Subramanian told CNBC’s “Street Signs Asia” on Tuesday.
The announced moves “have the potential to push India into an orbit of 8% + growth in a few years,” he said. India’s planned infrastructure spending for the next fiscal year may continue to add to the recovery, while the proposal to spend more than double on healthcare is a “significant moment” in the country’s history, according to Subramanian.
These measures are expected to “lay the groundwork for India’s growth at a very high rate of 8% + in this decade,” Subramanian said.
From survival to rebirth
A shift in focus from rising revenue spending in the current fiscal year to rising capital spending for the next signals the country’s pivot from a “survival” strategy to a “revival” strategy, according to Citi economists.
Barber Ranjit (R) shaves a client’s man under the flight from Amritsar on September 22, 2019.
Narinder Nanu | AFP | Getty Images
“The budget has refrained from an immediate stimulus of demand, with the hope that supply-side spending on (infrastructure) would generate demand-side impulses,” economists wrote in a note on Monday.
Capital expenditures proposed by India in the budget increased by 34.5% compared to a year ago to 5.54 trillion rupees (about $ 80 billion).
Monday’s budget was announced in a context in which South Asia’s largest economy is expected to decline by 7.7% in the current fiscal year. Last year, India went into a technical recession due to the economic downturn from a long deadlock to slow the spread of the coronavirus outbreak.
Transparent budgetary mathematics
Economists have agreed that the budget addresses long-standing issues of transparency by reducing off-balance sheet government spending – which is high spending, which is usually not included in the budget. The government’s fiscal and growth targets also appear realistic and achievable, they said.
“While this could optically increase the reported fiscal deficit, a very credible set of revenue and expenditure assumptions should reduce the fear of fiscal slips during the year,” Citi economists said. “In fact, budget math seems to be consciously sub-promising, leaving the scope to offer more.”
Finance Minister Sitharaman said the government deficit target for the next fiscal year would be about 6.8% of GDP, which is less than the 9.5% set for the current year ending March 31.
Rini Sen and Sanjay Mathur of ANZ Research said the arithmetic fiscal and macroeconomic assumptions underlying Monday’s budget were realistic, minimizing the risk of the government slipping away from the target. As such, the budget seems “much more achievable than in the past,” they said.
Some doubts remain
Although economists have generally agreed that the budget focuses on ways to revive India’s growth, some have said it may not be enough.
The budget did not have the “audacity of spending to make an immediate impact” to help an economy struggling with a lack of demand and poor employment opportunities, especially in the informal sector, according to Kunal Kundu, an Indian economist at Societe Generale.
He explained in a note that public capital expenditures allocated to roads and railways are less than 1% of the nominal GDP projection for the next fiscal year. “For most of the other measures announced, the real level of public spending will be conditioned by several factors, including how some public-private partnerships develop,” as well as whether and how privatization is happening, Kundu said.
He added that the Rs 200 billion allocated to recapitalize public sector banks may not be enough in an environment where many creditors are expected to face asset quality problems – as a result, credit growth banking could have an impact just as the economy recovers.
However, the announced policies can stimulate gradual growth in the medium term if implemented correctly, according to Kundu.
Media reports said the rating agency Moody’s has expressed doubts about India’s ability to reach higher revenue and divestment targets in the budget.