India is set to announce its annual budget on Tuesday.
It comes at a time when South Asia’s largest economy is trying to boost growth and return to pre-pandemic levels of expansion, while tackling a third wave of coronavirus infections.
Finance Minister Nirmala Sitharaman will be releasing details of the budget for the fiscal year that starts April 1. Economists are expecting measures that support growth and also allow the government to reduce its deficits and debt accumulation at the same time.
“She will have to strike a fine balance between the persistent ask for demand stimulus, continued capex push and fiscal consolidation,” Bank of America economists said in a Jan. 25 note. They pointed out that with a number of Indian states heading to the polls as early as February, there are some simmering concerns that the Feb. 1 budget may turn into a populist one.
“Despite the polls pressure, we expect [fiscal year 2023] union budget to stick to the reform agenda,” the economists said.
India will likely rely on strong tax receipts as well as asset sales, according to Santanu Sengupta, senior economist at Goldman Sachs. It would probably pull back on a number of Covid-related subsidies to fund capital spending plans for the next year, without excessively accumulating debt, he added.
“If you look at tax collections this year, it has surprised ahead of budget estimates,” he said Monday on CNBC’s “Street Signs Asia.” That includes both direct and indirect taxes. With an improved growth trajectory and more formalization of the economy, India’s tax receipts are getting a boost, Sengupta explained.
“We expect this tax buoyancy to continue into next year as well,” he added.
Fiscal deficit
India’s fiscal deficit target for the new year will be closely watched by investors and ratings agencies.
A fiscal deficit is the gap between a government’s income and spending, and it implies that the country is spending more than its revenue.
India plans to set its deficit target between 6.3% to 6.5% of GDP, local media reported, citing several government officials. That’s a touch lower than the current year’s target of 6.8%, which Sitharaman previously said was necessary to get the Indian economy back on track after the Covid outbreak derailed growth.
Citi analysts this month said their base case projections predict a fiscal deficit target of 6.2% of GDP, but they pointed out it “remains a broad political call.”
“The 60bps of GDP reduction in fiscal deficit would amply demonstrate the government’s resolve to get back to the path of fiscal discipline and comfort the investors in the year of possible Global Bond Index inclusion,” they wrote.
Reports say that Indian government bonds could potentially be included in a few global bond indexes this year — in what would be a significant milestone for the country. The inclusion would allow debt capital to flow into India and could increase foreign ownership of Indian government securities.
Bank of America economists expect a comparatively lower, but still high fiscal deficit target of 5.8% of GDP. Goldman Sachs expects the figure at 6.3% of GDP while Japanese investment bank Nomura expects a target of 6.4% of GDP.
“The government’s fiscal policy since the pandemic began has prioritised growth and fiscal transparency over fiscal consolidation, in the hope that robust medium-term growth prospects will help with debt sustainability,” Nomura analysts wrote in a recent note. “We expect this theme to persist.”
Fiscal transparency is where citizens are informed about how the government spends its revenue from tax receipts and other sources.
Infrastructure push
Economists expect infrastructure push to be one of the key themes of Tuesday’s budget.
It comes amid signs that investment demand in the country might finally be picking up while pent-up consumer demand fizzles out.
Last year, India said it planned to monetize some $81 billion worth of state-owned assets over the next four years to boost infrastructure spending and stimulate growth. The government planned to lease out assets like gas pipelines, roads, railway stations and warehousing facilities to the private sector to operate, reports said.
The government is also set to take state-owned Life Insurance Corporation public this year in what is said to be India’s largest initial public offering.
“Visible implementation of the asset monetization pipeline, infra pipeline and disinvestment plans will be high on the government agenda and a key market focus,” Citi analysts said.
Restoring jobs and reforms
Other likely budget priorities would include restoring jobs, supporting sectors disproportionately affected by the pandemic, banking sector reforms, climate policies as well as measures for the health and education sectors, according to economists.
While India’s national unemployment rate has climbed back to pre-pandemic levels of around 7%, it is accompanied by a lower rate of labor participation and employment rates that are below the early 2020 levels, according to Radhika Rao, senior economist at Singapore’s DBS Group. That pointed to the absence of broad-based improvement in job conditions, she said in a note this month.
“When this is juxtaposed against the faster restoration of formal jobs vs informal jobs and dominance of casual labour (lack of a security net) as well as self-employed in the labour mix, the adverse impact on incomes and purchasing power becomes apparent,” Rao said.
“Whilst farm jobs were little changed, manufacturing followed by service sectors are still below pre-pandemic levels,” she added.
The government needs policies to revive and support the micro-, small- and medium-scale businesses, which are the biggest job creators in India, according to Rumki Majumdar, an economist at Deloitte.
“Identifying their pain areas and devising a solution to help them become a part of ‘Atmanirbhar Bharat’ will aid in their recovery,” she wrote. Atmanirbhar Bharat is a campaign that’s part of the government’s policy push to make India more self-reliant.
“In addition, access to credit is critical, and providing targeted credit support to these enterprises should be considered,” Majumdar added.
