SINGAPORE – According to Krishnamurthy Subramanian, the country’s chief economic adviser, India’s budget for the fiscal year beginning April 1 has the potential to push growth above 8% in the coming years.
Finance Minister Nirmala Sitharaman on Monday announced a budget that emphasized capital expenditures and focused on health and infrastructure spending, as well as some financial sector reforms.
The budget has given 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 growth of more than 8% within a few years,” he said. India’s planned infrastructure spending for the coming fiscal year could further contribute to the recovery, while the proposal to more than double health care spending is a “landmark moment” in the country’s history, Subramanian said.
Those measures are expected to “lay the groundwork for India to grow at a very rapid pace, 8% +, in this decade,” Subramanian said.
From survival to revival
A shift of focus from growth in revenue expenditures in the current fiscal year to growth in capital expenditures for the following indicates that the country is shifting from a “survival strategy” to a “revival strategy,” Citi economists said.
Ranjit (R) roadside shaves a customer’s beard under the viaduct in Amritsar on September 22, 2019.
Narinder Nanu | AFP | Getty Images
“The budget has refrained from an explicit immediate demand side stimulus in the hope that supply side spending on (infrastructure) would generate momentum on the demand side,” the economists wrote in a note on Monday.
India’s proposed budget capital expenditures are up 34.5% from a year ago to 5.54 trillion rupees (about $ 80 billion).
Monday’s budget was announced against a backdrop where South Asia’s largest economy is expected to contract by 7.7% in the current fiscal year. Last year, India entered a technical recession as a result of the economic repercussions of a protracted lockdown to slow the spread of the coronavirus outbreak.
Transparent budget account
Economists agreed that the budget addresses long-standing issues of transparency by cutting off-balance-sheet government spending – that is, large expenditures that are usually not accounted for in the budget. The government’s budgetary and growth targets also seemed realistic and achievable, they said.
“While this could optically push up the reported budget deficit figure, a very credible set of assumptions on the revenue and expenditure side should alleviate fears of fiscal slippage during the year,” said the Citi economists. “In fact, the budget calculation seems deliberately under-promising, leaving room to deliver more.”
Finance Minister Sitharaman said the government’s deficit target for the next fiscal year would be about 6.8% of GDP, which is lower than the 9.5% pegged for the current year ending March 31.
ANZ Research’s Rini Sen and Sanjay Mathur said the fiscal arithmetic and macroeconomic assumptions that support Monday’s budget are realistic, minimizing the risk of the government slipping off target. As such, the budget appears “much more attainable than in the past,” they said.
Some doubts remain
While economists generally agreed that the budget focused on ways to revitalize India’s growth, some said it may not be enough.
According to Kunal Kundu, Indian economist at Societe Generale, the budget lacked the “brutality of expenditure necessary for immediate impact” to help an economy struggling due to lack of demand and poor employment, especially in the informal sector.
He explained in a note that public capital expenditure on roads and railways is less than 1% of the nominal GDP projection for the following fiscal year. “For most of the other announced measures, the actual level of government spending will depend on multiple factors, including the development of some public-private partnerships,” and whether and how privatization takes place, Kundu said.
He added that the 200 billion rupees set aside for the recapitalization of public sector banks may not be enough in an environment where many lenders are expected to face asset quality issues – as a result, banks’ credit growth may take a hit, just as the economy recovers.
Still, according to Kundu, the announced policy can stimulate gradual growth in the medium term, if properly implemented.
According to media reports, rating agency Moody’s also had doubts about India’s ability to achieve higher revenue and divestment targets set in the budget.