Government spending on health, infrastructure expected

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

The growth outlook for South Asia’s largest economy remains fragile.

After sinking into a technical recession last year following a protracted lockdown to slow the spread of the coronavirus outbreak, economic data is showing signs of recovery. But India’s Ministry of Statistics said last month that advanced data indicated that the economy was still contracting 7.7% for the current fiscal year.

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

The government is facing increasing challenges while the risks of a second wave of coronavirus linger. That includes replacing the millions of jobs lost in the national lockdown between the end of March and May, as well as farmers protesting agrarian reform laws. India will also need to address its budget deficit, which has been blown past target by the economic slowdown.

The upcoming budget is likely to prioritize social services to address the economic consequences of Covid-19 and its impact on millions of Indians, and find ways to get growth back on track. Economists expect the budget to focus on areas such as health care, housing, employment, infrastructure spending, and for resources to be allocated to India’s mass vaccination.

According to Radhika Rao, an economist at DBS Group in Singapore, the coming budget will be driven by the shifts in the economy as a result of the pandemic. She explained that India will likely go for a K-shaped recovery, with some areas of the economy growing while other areas lagging.

1. Healthcare

India is expected to increase spending to improve the country’s pressured healthcare infrastructure as it struggled to cope with the coronavirus pandemic. Last year, reports reported that many outbreaks of infection, including New Delhi, did not have enough ICU beds for Covid-19 patients.

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

Apart from making allocations for the vaccination program (0.2-0.5% of GDP, depending on how much is supported by the state), an effort to expand the nationwide insurance system, strengthen the welfare construct and improve Accelerating infrastructure, such as hospital beds and physician population ratios, will be a priority, ”said Rao of the DBS Group by email.

2. Infrastructure

Experts say the Indian government sees spending on infrastructure as an important way to boost 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, although likely far less than the 40% increase required by the Ministry of Road, Transport and Highways,” said Akhil Bery, South Asia analyst at Eurasia Group.

“Given the pressures on finances from both central and state governments, the Modi government will need to encourage more private investment to accelerate infrastructure deployment,” said Bery.

In December 2019, India reportedly set an ambitious goal of building an infrastructure worth 102 trillion rupees (about $ 1.4 trillion) over the next five years. But financing those projects is likely to be challenging, both for the government and for banks grappling with strained loan portfolios.

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

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 boost low-skilled jobs, Credit Suisse economists said in a report last month. The housing and construction sector in India is labor intensive and offers many employment opportunities.

Nilesh Shah, general manager of Kotak Mahindra Asset Management, told CNBC that the budget should provide a tax break to support the construction and real estate sectors, while providing a boost to industries hard hit by Covid-19, such as hospitality and retail. .

“The budget should aim to mobilize resources by improving tax compliance, closing tax gaps and generating revenue from government assets,” Shah said by email to CNBC. He added that it “should reassure investors with ongoing reforms to improve business in India and maintain the path of fiscal caution.”

According to local media reports, tax collection on goods and services unexpectedly grew 11.6% year-on-year in December, partly due to heightened vigilance on tax evasion.

Rao of the DBS Group said she expects the budget can increase allocations to existing employment schemes and programs to encourage recruitment and to continue to provide credit guarantee schemes and liquidity support to small and medium-sized businesses.

Last year, when India announced its fiscal stimulus, economists were unimpressed. Some said the government had no leeway to make the kind of heavy expenditure needed to boost the economy. A higher government deficit would likely have further eroded India’s already weakened creditworthiness.

“Even at the height of the pandemic, the government had been cautious about increasing discretionary spending and reducing spending in non-stimulus areas to contain the deficit,” said Priyanka Kishore, chief of economies in India and Southeastern. Asia at Oxford Economics, on CNBC.

For the forthcoming budget, “India must avoid the trap of making the wrong choice between restoring growth and moving back to fiscal consolidation,” wrote Varathan of Mizuho. “The last is a lost cause without the first.”

He said any lasting effort to reduce the government deficit must be anchored by a viable and sustainable revenue path, for which India must have solid growth potential. The strategy should be to cut public spending in a way that “allows the private sector to sustainably absorb the slowdown with a more steady recovery,” said Varathan.

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