A worker quenches his thirst with water from a bottle and pauses to remove weeds from a park near India Gate as temperatures rise in New Delhi on May 27, 2020.
Jewel samad | AFP | Getty Images
SINGAPORE – India’s Finance Minister Nirmala Sitharaman is due to present the country’s annual budget on Monday for the new fiscal year starting April 1st.
The growth prospects for South Asia’s largest economy remain fragile.
After slipping into a technical recession last year due to a protracted lockdown to slow the spread of the coronavirus outbreak, economic data is showing some signs of recovery. But the Indian Ministry of Statistics said last month that advanced data is the The economy still shrank by 7.7% in the current financial year.
The upcoming budget “must go a very thin, tight rope 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 finance department, on a Friday note.
The government faces growing challenges while the risk of a second wave of coronavirus remains. This includes replacing the millions of jobs lost during the national lockdown between late March and May, as well as farmers protesting against agrarian reform laws. India will also have to get its budget deficit under control blown over the target due to the economic slowdown.
The upcoming budget is likely to prioritize social welfare to address the economic impact of Covid-19 and its impact on millions of Indians and to find ways to get growth going again. Economists expect the budget to target areas such as healthcare, housing, employment, infrastructure spending, as well as the allocation of resources for India’s mass vaccination campaign.
Radhika Rao, an economist at DBS Group in Singapore, said the upcoming budget will be determined by the changes in the economy due to the pandemic. She explained that India is likely to seek a K-shaped recovery, with some parts of the economy growing while other areas lagging behind.
1. Health care
India is expected to increase spending to improve the country’s weak health infrastructure that has struggled to fight the coronavirus pandemic. Last year, Reports said Many sources of infection, including New Delhi, did not have enough intensive care beds for Covid-19 patients.
In January India also launched a mass vaccination program aimed at vaccinating 300 million people in the first phase, most of them frontline workers and those over 50 or in high-risk groups.
“Aside from the allocations for the vaccination program (0.2-0.5% of GDP, depending on how many are supported by the state), this is an expansion push the nationwide insurance systemStrengthening the welfare construct and accelerating the infrastructure surge, i.e. H. the ratio of hospital beds and doctors to the population will be a priority, “Rao told DBS Group via email.
Experts say the Indian government sees infrastructure spending as an important way to boost job creation in an economy where millions are struggling to find jobs and revitalize growth.
“The new budget will increase funding for roads and railways, albeit likely by far less than the 40% increase requested by the Ministry of Roads, Transport and Highways,” said Akhil Bery, South Asia analyst with the Eurasia Group, a political risk adviser.
“Given the strain on the finances of the central and state governments, the Modi government needs to encourage more private investment to accelerate infrastructure expansion,” Bery said.
In December 2019 in India supposedly set an ambitious goal Building infrastructure worth Rs. 102 trillion (approximately $ 1.4 trillion) over the next five years. However, funding these projects is likely to be a challenge for both the government and banks grappling with strained loan books.
Bery said the government is expected to set up a bank to fund port, road and energy projects and match it with the existing India Infrastructure Financing Company. The government is expected to provide initial funding and attract foreign investors.
He added that the defense sector is also likely to see an increase in spending due to ongoing border tensions with China.
3. Housing and employment
India could focus its spending on the housing sector, particularly in urban areas that could encourage low-skilled jobs, Credit Suisse economists said in a report last month. The housing and construction sector in India is labor intensive and offers significant jobs.
Nilesh Shah, managing director of Kotak Mahindra Asset Management, told CNBC that the budget should include a tax break to support the construction and real estate sectors while stimulating industries hit hard by Covid-19 such as hospitality and retail.
“The budget should focus on mobilizing resources by improving tax compliance, closing tax loopholes and monetizing government assets,” Shah told CNBC via email. He added that it should “reassure investors with continued reforms to make doing business in India easier and to maintain the path of fiscal caution”.
In December, tax revenues for goods and services in India rose 11.6% year-over-year, unexpectedly, in part due to heightened vigilance on tax evasion local media reports.
DBS Group’s Rao said she believed the budget could increase allocations for existing employment programs and programs to incentivize hiring and continue to provide small and medium-sized businesses with loan guarantee schemes and liquidity support.
Budget deficit target
Last year when India announced its fiscal stimulus measures, economists were unfazed. Some said the government had no room to make the heavy spending needed to stimulate the economy. A higher government deficit would likely have India’s already weakened credit rating was further affected.
“Even at the height of the pandemic, the government had been cautious about increasing discretionary spending and compressed spending in non-stimulatory areas to address the deficit,” Priyanka Kishore, head of Indian and Southeast Asian economics at Oxford Economics, told CNBC .
For the upcoming budget, “India must avoid the trap of making the wrong choice between restoring growth and returning to fiscal consolidation,” Mizuho’s Varathan wrote. “The latter was lost without the former.”
He said any sustained attempt to reduce the public deficit must be anchored by a feasible and sustainable revenue path that assumes India has solid growth potential. The strategy should be to withdraw public spending in such a way that “the private sector can sustainably offset the doldrums with a more even recovery,” said Varathan.
Kishore expects the total budget deficit to decrease from 7.4% of GDP in the current fiscal year to around 6% in the next fiscal year.