SINGAPORE – According to Krishnamurthy Subramanian, the country’s chief economic adviser, India’s budget for the financial year starting April 1 could boost growth to above 8%.
Finance Minister Nirmala Sitharaman on Monday announced a budget focusing on capital spending and focusing on healthcare and infrastructure spending, as well as some reforms in the financial sector.
The budget has put “significant pressure” on India’s V-shaped economic recovery, Subramanian told CNBC’s Street Signs Asia on Tuesday.
The announced moves “have the potential to push India into an 8% + growth trajectory within a few years,” he said. India’s planned infrastructure spending for the coming financial year could further contribute to the recovery, while the proposal for more than double spending on health care is a “signing moment” in the country’s history, according to Subramanian.
The measures are expected to ‘lay the groundwork for India to grow at a very high rate of 8% + in this decade,’ Subramanian said.
From survival to revival
According to Citi economists, the focus of the growth of revenue spending in the current financial year after the growth of capital expenditures for the next year is at the heart of a ‘survival’ strategy, a revival strategy.
Road hacker Ranjit (R) shaved a customer’s beard under the fly in Amritsar on 22 September 2019.
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“The budget refrained from an explicit immediate demand side stimulus in the hope that the supply side would generate (infrastructure) demand on the demand side,” the economists wrote in a Monday note.
India’s proposed capital expenditure in the budget increased by 34.5% from a year ago to 5.54 billion rupees (about $ 80 billion).
Monday’s budget was announced against the backdrop where the largest economy in South Asia is expected to shrink by 7.7% in the current financial year. Last year, India plunged into a technical recession due to the economic consequences of a long halt to slow the spread of the coronavirus outbreak.
Transparent budget math
Economists agreed that the budget dealt with long-standing issues of transparency by reducing government spending out of balance – these are large expenditures that are usually not taken into account in the budget. The government’s fiscal and growth targets also looked realistic and achievable, they said.
“While this will optically increase the reported fiscal deficit number, a very credible assumption on the revenue and expenditure side should reduce the fear of fiscal weakening during the year,” the Citi economists said. “In fact, budget mathematics does not seem to be consciously promising, leaving room for more.”
Finance Minister Sitharaman said the government’s deficit target for the next financial year would be around 6.8% of GDP, which is lower than the 9.5% fixed for the current year ending March 31 .
Rini Sen and Sanjay Mathur of ANZ Research said the fiscal arithmetic and macroeconomic assumptions underlying Monday’s budget are realistic, minimizing the risk of the government deviating from the target. As such, the budget seems ‘much more achievable than in the past’, they said.
There is still doubt
Although economists generally agreed that the budget focused on ways to revive India’s growth, some said it might not be enough.
According to Kunal Kundu, an economist at Societe Generale, Kunal Kundu, an economy in India, has the ‘courage of spending needed for immediate impact’ to help an economy struggling due to a lack of demand and lack of jobs, especially in the informal sector.
He explained in a comment that public capital expenditure for roads and railways is less than 1% of the nominal GDP projection for the next financial year. “For most of the other measures announced, the actual level of public spending will depend on several factors, including how some public-private partnerships develop,” as well as or how privatization takes place, Kundu said.
He added that the 200 billion rupees earmarked for public sector recapitalization may not be enough in an environment where many lenders are expected to face asset quality issues. As a result, bank credit growth could take a hit just as the economy recovers.
However, according to Kundu, the announced policies can gradually spur growth in the medium term if applied properly.
According to media reports, the rating agency Moody’s also expressed doubts about India’s ability to achieve higher revenue and sales targets in the budget.