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India set to boost spending in Budget to beat pandemic woes

Finance Minister will likely make a generous allocation for development, put more money in the hands of the average taxpayer to boost consumption and ease rules to attract foreign investments

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman

Spending likely to keep fiscal deficit far wider than 3% of GDP mandated by law

India will unveil its closely watched Budget on Monday, expected to get it back on track as the world's fastest-growing major economy by boosting spending on job-creation and rural development while battling back the coronavirus.

Finance Minister Nirmala Sitharaman will likely make a generous allocation for development, put more money in the hands of the average taxpayer to boost consumption and ease rules to attract foreign investments when she presents the Budget at 11 a.m. in New Delhi.

"Expectations are high, going into this Budget," said Samiran Chakraborty, an economist with Citigroup Inc. "Expenditure profile could move from survival to revival as the focus on infrastructure increases."

That spending may continue to keep the fiscal deficit far wider than the 3 per cent of gross domestic product mandated by law. The Budget gap for the year to March will probably be 7.25 per cent of GDP, according to a Bloomberg survey. The same poll shows the target for the next fiscal year will likely be 5.5 per cent.

Missing deficit goals will be the least of the worries for Prime Minister Narendra Modi's government. It has to contend with creating jobs for the millions who lost their livelihoods to lockdowns to combat the world's second-largest coronavirus outbreak, quelling protests by farmers against agriculture reforms and reviving growth in an economy headed for its biggest annual contraction on record.

India's GDP will shrink 7.7 per cent in the year ending March, according to the statistics ministry. The Finance Ministry estimates GDP will likely expand 11 per cent next fiscal year, people familiar with the matter said, commenting on the forecast that formed the basis for drawing up the Budget aimed at once again making India the world's fastest-growing major economy ahead of China's estimated 8.1 per cent pace.

To help achieve this goal, Sitharaman said her Budget would be unlike anything seen so far.

A pickup in tax collections in recent months will offer some respite for Sitharaman, who will also seek to raise record amounts by selling state assets in the new financial year starting April after the pandemic all but ruined disinvestment plans in the current year. Her efforts will also get a boost from the annual dividend paid to the government by the central bank, which is expected to also complement fiscal steps with more monetary stimulus when it meets later next week.

Opinion is divided about new tax measures in the Budget, with some calling for a tax on the rich to fund pandemic-related expenditure and others opposing any such move.

"A 4 per cent tax on the nation's 954 richest families could raise the equivalent of 1 per cent of India's GDP," Oxfam said in a report released Monday. Economists including Nomura Holdings Inc.'s Sonal Varma think a Covid levy is a bad idea given that the economy is still normalizing after a strict and vast lockdown.

What Bloomberg Economics says...

"The trend over the last few years has already raised the total taxes for high income earners to 42.7 per cent, including cess and surcharges, from around 30 per cent."

- Abhishek Gupta, India economist

Still, improved tax collections and income from privatization should help the finance minister pare borrowings next fiscal year.

She may announce a gross borrowing plan of 10.6 trillion rupees ($145 billion) for the 12 months starting April, according to a median forecast of 15 analysts surveyed by Bloomberg News. That's less than the record 13.1 trillion rupees estimated for the current year.

Key Themes

The total spending plan for next fiscal may surpass last year's 30.4 trillion rupees, with focus likely on expanding a jobs guarantee program to cities and increasing allocation on education, housing, and health as India rolls out a vaccine drive to inoculate 1.3 billion people. Outlay for defense may also see an increase, in a signal to China that India is prepared and capable of dealing with the border standoff.

"Unsurprisingly, many of the key themes in the Budget will revolve around Covid-19, either directly on health issues, or regulatory support to sectors most affected" such as hospitality, retail, aviation, said Nomura's Varma. "Infrastructure, agriculture, the social sector, promotion of domestic manufacturing, alongside incentives to boost construction and housing are likely to be the focus."

While Modi's popularity with voters has remained undiminished, there's an expectation his government may use Monday's Budget to win over protesting farmers. The protesters have been opposing India's new agriculture laws that they say will hurt incomes and leave them vulnerable to big corporations.

"The government has no choice but to loosen up their purse strings," said Yamini Aiyar, president and chief executive of Centre for Policy Research in New Delhi. "They will have to be more generous with social security spending like expanding jobs programs to correct rising urban joblessness, health spending, expanded housing and more fiscal support for states and local governments." (Bloomberg)

Vrishti Beniwal
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