Government spending on health, expected infrastructure

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

Growth prospects for South Asia’s largest economy remain fragile.

After plunging into a technical recession last year due to a long blockade to slow the spread of the coronavirus outbreak, economic data shows some signs of recovery in progress. But India’s statistics ministry said last month that advanced data indicates that the economy has still shrunk 7.7% in the current fiscal year.

The next budget “will have to go a tightrope and balancing a path to consolidation, but not at the expense of restoring growth,” said Vishnu Varathan, head of economics and strategy for Mizuho Bank’s Asia and Oceania Treasury Department, on a Friday note.

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

The next budget is likely to prioritize social welfare to address the economic consequences of Covid-19 and its impact on millions of Indians, and to find ways to put growth back on track. Economists expect the budget to be targeted at areas such as health, housing, employment, infrastructure spending, as well as allocating resources for India’s mass vaccination campaign.

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

1. Health care

India is expected to increase spending to improve the country’s precarious health infrastructure, which has struggled to cope with the coronavirus pandemic. Last year, reports said that many critical points of infection, including New Delhi, did not have enough ICU beds for patients with Covid-19.

In January, India also launched a mass immunization program that aims to inoculate 300 million people in its first stage, most of them frontline workers and those over 50 or in high-risk groups.

“In addition to making allocations for the vaccination program (0.2-0.5% of GDP, depending on how many are supported by the state), an impulse to expand the national insurance scheme, strengthen welfare construction and accelerate the infrastructure, that is, hospital and medical beds for population ratios, will be a priority, “said Rao of the DBS Group by email.

2. Infrastructure

Experts say the Indian government is considering infrastructure spending as an important way to boost job creation in an economy where millions of people are struggling to find work and resume growth.

“The new budget will increase funding for roads and railways, although probably by much less than the 40% increase desired by the Ministry of Roads, Transport and Highways,” said Akhil Bery, South Asia analyst at political risk consultancy 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,” said Bery.

In December 2019, India set an ambitious goal of building infrastructure worth 102 trillion rupees (about $ 1.4 trillion) over the next five years. But financing these projects is likely to be a challenge, both for the government and for banks struggling with tense loan books.

Bery said the government is expected to establish a bank to help finance port, road and energy projects and to merge it with the existing India Infrastructure Financing Company – the government is expected to provide initial financing and involve foreign investors.

He added that the defense sector is also likely to see an increase in spending due to continuing tensions on the border 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 are labor intensive and provide substantial jobs.

Nilesh Shah, managing director of Kotak Mahindra Asset Management, told CNBC that the budget should provide a tax concession to support the construction and real estate sectors, while stimulating sectors that were hit hard by Covid-19, such as hospitality and retail.

“The budget should focus on resource mobilization, improving tax compliance, plugging tax loopholes and monetizing government assets,” Shah told CNBC via email. He added that he must “reassure investors with continued reforms to improve the ease of doing business in India and maintain the path of fiscal prudence”.

In December, India’s tax collection on goods and services grew unexpectedly 11.6% over last year, partly due to increased vigilance over tax evasion, according to local media reports.

Rao of the DBS Group said he hoped the budget could increase allocations to existing employment schemes and programs to encourage hiring, as well as continuing to provide credit guarantee and liquidity support schemes to small and medium-sized businesses.

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

“Even at the height of the pandemic, the government has been cautious about increasing discretionary spending and has compressed spending in areas with no stimulus to manage the deficit,” Priyanka Kishore, head of economics in India and Southeast Asia at Oxford Economics, told CNBC.

For the next budget, “India must avoid the trap of a false choice between restoring growth and returning to the path of fiscal consolidation,” wrote Varathan de Mizuho. “The latter is a lost cause without the former.”

He said that any lasting attempt to reduce the government deficit must be anchored by a viable and sustainable revenue path, which requires India to have solid growth potential. The strategy should be to eliminate public spending in a way that “allows the private sector to sustainably increase slack amid a more uniform recovery,” said Varathan.

Kishore said he expects the general fiscal deficit to decrease from 7.4% of GDP in the current fiscal year to about 6% in the next.