SINGAPORE – India’s budget for the fiscal year beginning April 1 has the potential to increase growth above 8% over the next two years, according to Krishnamurthy Subramanian, the country’s top economic advisor.
Finance Minister Nirmala Sitharaman announced on Monday a budget that emphasizes capital expenditures and focuses on health and infrastructure spending, as well as some reforms in the financial sector.
The budget gave a “significant boost” to India’s V-shaped economic recovery, Subramanian told CNBC’s “Street Signs Asia” on Tuesday.
The announced measures “have the potential to push India into an 8% + growth orbit in a few years,” he said. India’s planned infrastructure spending for the next fiscal year may further contribute to the recovery, while the proposal to more than double healthcare spending is a “landmark moment” in the country’s history, according to Subramanian.
These measures are expected to “lay the foundation for India to grow at a really high rate, 8% + in this decade,” said Subramanian.
From survival to revival
A shift in focus from revenue expenditure growth in the current fiscal year to capital expenditure growth for the next signals the country’s pivot from a “survival” strategy to a “rebirth” strategy, according to Citi economists .
Barber Ranjit (R) on the road shaves a client under the overpass in Amritsar on September 22, 2019.
Narinder Nanu | AFP | Getty Images
“The budget avoided an explicit stimulus on the demand side, 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 34.5% over the previous year, to 5.54 trillion rupees (about US $ 80 billion).
Monday’s budget was announced in a scenario in which South Asia’s largest economy is expected to shrink 7.7% in the current fiscal year. Last year, India entered a technical recession due to the economic consequences of a long blockade to slow the spread of the coronavirus outbreak.
Transparent budget math
Economists agreed that the budget addressed long-standing issues of transparency, reducing overspending government spending – these are large expenditures that are generally not accounted for in the budget. The government’s fiscal and growth targets also looked realistic and achievable, they said.
“While this can optically increase the number of reported fiscal deficits, a very reliable set of assumptions about income and expenses should reduce the fear of fiscal deviations during the year,” said Citi economists. “In fact, budget math seems to be consciously promising, leaving room for more results.”
Finance Minister Sitharaman said the government’s deficit target for the next fiscal year would be around 6.8% of GDP, which is less than the 9.5% set for the current year ending on 31 December. March.
ANZ Research’s Rini Sen and Sanjay Mathur said the arithmetic and macroeconomic fiscal assumptions that underpin Monday’s budget are realistic, which minimizes the risk that the government will deviate from the target. As such, the budget looks “much more achievable than in the past,” they said.
Some doubts remain
While economists in general agree that the budget focuses on ways to revive India’s growth, some said it may not be enough.
The budget lacked the “audacity of spending necessary for an immediate impact” to help an economy struggling due to lack of demand and weak employment opportunities, especially in the informal sector, according to Kunal Kundu, Indian economist at Societe Generale.
He explained in a note that public capital expenditure reserved for highways and railways is less than 1% of the nominal GDP projection for the next fiscal year. “For most of the other measures announced, the actual level of public spending will depend on a number of factors, including how some public-private partnerships develop,” as well as whether and how privatization happens, said Kundu.
He added that the 200 billion rupees earmarked for the recapitalization of public sector banks may not be enough in an environment where many creditors must face asset quality problems – as a result, the growth of bank credit may suffer a blow as soon as the economy recovering.
Even so, the announced policies can stimulate gradual growth in the medium term if properly implemented, according to Kundu.
Media reports said the rating agency Moody’s also expressed doubts about India’s ability to achieve greater revenue and divestment targets assumed in the budget.