India ramps up public spending, but views divided over amount for recovery

10, Feb. 2021

India's Finance Minister Nirmala Sitharaman delivering her budget statement to parliament on Feb. 1, 2021. India will boost healthcare spending by 135 percent and lift caps on foreigners investing in its huge insurance market. (Photo courtesy of PTI)
India's Finance Minister Nirmala Sitharaman delivering her budget statement to parliament on Feb. 1, 2021. India will boost healthcare spending by 135 percent and lift caps on foreigners investing in its huge insurance market. (Photo courtesy of PTI)

NEW DELHI, NNA - Last week, the buoyant market intensified its recent bull run, sending Indian stocks to new record highs after India announced a nearly half-a-trillion-dollar 'get-well-soon' budget with sizable priority spending for healthcare and capital for the new financial year starting April 1.

Aimed at laying the foundation for stronger growth in the next four to five years, the country will jack up health expenditure by a whopping 137 percent to 2.2 trillion rupees ($30.2 billion) and capital outlay by 35 percent to 5.54 trillion rupees to boost infrastructure.

Expectedly, the huge health allocation will help enhance public health systems tremendously and fund the mega drive to vaccinate 1.3 billion people for the COVID-19 virus that has infected 10.8 million and killed more than 155,000.

Industrialists, bankers, investors and analysts also applauded the government's move to assign an enormous budget for infrastructure development, which it hoped would help lead the country out of its worst economic crisis.

Also, the government has spared the individual and corporate taxpayer by not increasing direct taxation as it wants to bolster consumption and investment.

After announcing the new budget of 34.83 trillion rupees in Parliament last Monday, Finance Minister Nirmala Sitharaman told reporters, “All of us decided to give impetus to the economy and that impetus, we thought, would be qualitatively spent and give necessary demand push if we choose to spend big on infrastructure.”

Last Friday, India’s central bank, the Reserve Bank of India (RBI), announced that it would maintain its policy rates - such as the repo rate at 4 percent - to support the expansionary budget.

However, some key economists are less optimistic, criticizing the new budget as conservative as the overall outlay will edge up by only less than 1 percent. They also said it has not adequately addressed rife business troubles and unemployment which has hit millions.

But supporters still find its key pillars strong enough to inject confidence and lay a foundation for a nascent recovery.

Analysts told NNA that they saw the budget as one designed to put the coronavirus-battered economy back on a faster-growth trajectory as envisaged by policy makers.

To draw investments to a huge, growing market, the cap on foreign direct investment (FDI) for the insurance sector will be lifted from the current 49 to 74 percent.

India will allocate 200 billion rupees to recapitalize ailing state-run banks that have been burdened with bad loans. Sitharaman also announced the privatization of two banks as part of its disinvestment plan.

Ratings agency ICRA Ltd. said the thrust of the capital expenditure will cover defense, roads and railways, though the latter alone will account for 63 percent.

The agency believes the rise in health spending will benefit the health infrastructure as well the pharmaceutical industry, which is also producing COVID-19 vaccines for the world.

Keeping a lid on debt for the next financial year, the finance minister estimated the fiscal deficit to be 6.8 percent of the GDP with gross borrowing around 12 trillion rupees. This is lower than the estimated 9.5 percent for the current year which will see extra borrowing of 800 billion rupees in February and its ending month of March.

Shanti Ekambaram, group president of consumer banking at Kotak Mahindra Bank Ltd., said the additional borrowings show the government has prioritized bringing the economy back on track.

"Higher spends and investments are the need of the hour to bring normalcy and growth back to post-pandemic levels, even if it is at the cost of interim fiscal deviation,” she said.

Following the budget announcement, economic affairs secretary Tarun Bajaj stressed that the emphasis on infrastructure and other reforms is aimed at making India a $5 trillion economy by 2024-25.

He said the services sector is expected to rebound sharply as the immunization program is carried out across the country.

Bajaj said real GDP growth would hover around 10-10.5 percent in the next fiscal. He also assured that the government's record 2021-22 borrowing plan will not elbow out the private sector if credit demand picks up.

Uday Shankar, president of the Federation of Indian Chambers of Commerce and Industry, said the strong emphasis on infrastructure development will not only help propel growth but also make the country more prepared should it face adversities similar to pandemic ones again.

Suman Chowdhury, chief analytical officer of Acuité Ratings & Research said the central bank's decision to hold key policy rates to maintain its accommodative monetary policy is in step with market expectations.

Among the developmental measures announced by RBI, the extension of favourable long-term financing for credit institutions to new MSME (micro, small and medium enterprises) borrowers "will facilitate higher lending to smaller businesses, and thereby, encourage quicker revival of the economy.”

However, skeptics feel the government is not spending enough to promote growth and create jobs.

Mahesh Vyas, an eminent economist and CEO of the Mumbai-based Center for Monitoring the Indian Economy (CMIE), said, “I don’t know why the government is so hung up on being fiscally conservative when the whole world is suggesting that this is the time, like no other, to be profligate.”

“I don’t know any economist suggesting this line of policy,” he was quoted as saying in The New York Times.

In a CMIE report on unemployment in January, the private think-tank said higher job losses among young workers, which account for a major share of total employment, would not bode very well for a stronger recovery in the second half of the current fiscal or in the future.

Professor Anil K Sood, co-founder of the Institute for Advanced Studies in Complex Choices, said the 0.95 percent increase in total expenditure is far less than the inflation estimate.

"In real terms, the government support to the struggling economy is shrinking," he said in an opinion piece in SMEFutures.

"Our assessment is that the private sector will find it challenging to lead recovery, given that MSMEs are continuing to struggle for orders and finance and banks are inadequately capitalized particularly the public sector banks who have not received adequate capitalization support in the current budget too. If the private sector struggles to recover, the government will need to continue supporting the economy," said Sood.

In a blog post, former finance secretary Subhash Chandra Garg said the revised estimates for capital expenditure for the current year do not reflect an accurate picture and that the government is too optimistic about its capex provisions for the next fiscal.

He said the capital expenditure of railways for the current fiscal shows large revenue expenditure disguised as capital expenditure, which creates the "optical illusion" of higher capex.

However, the government believes trending recovery data and structural reforms are expected to push the Indian economy into delivering a V-shaped recovery, taking it past its pre-COVID level in two years.

According to its Economic Survey 2020-2021, India expects a recovery in the next fiscal with real GDP growth projected to rebound to 11 percent from a contraction of 7.7 percent in the current fiscal.

Released on Jan. 29, the survey said, “Starting July (2020), a resilient V-shaped recovery is well underway, as demonstrated by the recovery in GDP growth and the sustained resurgence in high frequency indicators such as power demand, E-way bills, goods and services tax (GST) collection and steel consumption.”

The official estimate tails the International Monetary Fund (IMF)’s forecast of 11.5 percent GDP growth.

Nomura Securities Co., Ltd., said the government's projection of 11 percent real GDP growth falls short of its more optimistic expectations of about 13.5 percent.

However, ratings agency CARE Ratings Ltd. said the projected 11 percent looks “impressive” but “needs to be interpreted with caution”.

“The real GDP growth of 11 percent in FY22 would take the GDP level to just above that in FY20,” it said.

Agreeing, economist and author Vivek Kaul noted that the forecast would see the GDP increasing by just 2.4 percent more than FY 2019-20 GDP. "What’s tricky is growth after that,” Kaul told NNA.

D.K. Joshi, chief economist at Crisil, a ratings and research firm, said the government would need to spend more if it wants to attain IMF's rosier forecast of 11.5 percent.

It is clear the government is trying to achieve a delicate balance between spending and managing deficits to keep inflation and prices down for the people.

“We have spent, we have spent and we have spent,” finance minister Sitharaman told reporters recently, adding that the government has also shown "a clear glide path for deficit management and bringing it down.”