Government spending on healthcare, infrastructure expected

SINGAPORE – Indian Finance Minister Nirmala Sitharaman will present the country’s annual budget for the new financial year starting on April 1 on Monday.

Growth prospects for the largest economy in South Asia remain fragile.

After sinking into a technical recession over the past year due to a long halt to slowing down the spread of the coronavirus outbreak, economic data show some signs of a recovery. However, India’s Ministry of Statistics said last month that advanced data indicated that the economy was still down 7.7% for the current financial year.

The forthcoming budget “will have to walk a tight, tightrope and balance a path to consolidation, but not at the expense of restoring growth,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank’s treasury. division Asia and Oceania, said in a Friday note.

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

The forthcoming budget is likely to prioritize social welfare to address the economic downturn of Covid-19 and its impact on millions of Indians, and to find ways to get growth back on track. Economists expect that the budget in areas such as health care, housing, employment, infrastructure spending as well as resources will be allocated to the mass vaccination of India.

According to Radhika Rao, an economist from the DBS group in Singapore, the shifts in the economy due to the pandemic will be determined by the upcoming budget. She explained that India is likely to go for a K-shaped recovery, where some parts of the economy will grow while other areas will lag behind.

1. Healthcare

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

In January, India also introduced 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.

“Apart from the allocation for the vaccination program (0.2-0.5% of GDP, depending on how much is supported by the state), an attempt is made to expand the nationwide insurance scheme, strengthen welfare construction and infrastructure accelerating, ie hospital beds and doctors around population ratios, will be a priority, “Rao of DBS Group said in an email.

2. Infrastructure

Experts say the Indian government sees infrastructure spending as an important way to promote job creation in an economy where millions of people are struggling to find work and revive growth.

“The new budget will increase funding for roads and railways, but probably with much less than the 40% boost the Ministry of Roads, Transport and Highways wants,” said Akhil Bery, an analyst at the Eurasia Group on Political Risks. said.

“Given the pressure on both central and public finances, the Modi administration will need to encourage more private investment to accelerate infrastructure implementation,” Bery said.

In December 2019, India apparently set an ambitious target to build 102 billion rupees (approximately $ 1.4 billion) over the next five years. But financing these projects is likely to be a challenge for the government as well as for banks struggling with strained loan books.

Bery said the government is expected to set up a bank to finance port projects, road and power projects and merge them with the existing India infrastructure financing company. The government is expected to provide the initial funding and involve foreign investors.

He added that the defense sector is also likely to see an increase in spending due to the continuing border tensions with China.

3. Housing and employment

India could focus spending on the housing sector, especially in urban areas that may promote low skills, Credit Suisse economists said in a report last month. Housing and construction sectors in India are labor intensive and offer great 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 fixed sector, while stimulating industries hit hard by Covid-19, such as hospitality and retail.

“Budget should focus on mobilizing resources by improving tax compliance, plugging tax loopholes and earning government assets,” Shah told CNBC in an 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, India’s tax collections on goods and services grew unexpectedly by 11.6% over last year, partly due to the caution of tax evasion, according to local media reports.

Rao from DBS Group said she expects the budget to increase allocations to existing employment schemes and programs to encourage, as well as to provide credit guarantee systems and liquidity support to small and medium-sized businesses.

Last year, when India announced its fiscal stimulus measures, economists were not impressed. Some have said the government does not have the space to tackle the kind of heavy spending needed to boost the economy. A higher government deficit would probably have further dampened India’s already weakened credit rating.

“Already at the height of the pandemic, the government has been careful to step up discretionary spending and compressed spending in non-stimulus areas to manage the deficit,” Priyanka Kishore, head of India and Southeast Asia at Oxford Economics, told CNBC said.

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

He said any lasting effort to reduce the government deficit should be anchored by a viable and sustainable revenue path, which requires India to have solid growth potential. The strategy should be to phase out public spending in a way that “enables the private sector to sustainably take up the slack amid a more even recovery,” Varathan said.

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