India, which is set to regain the world’s fastest-growing major economy title, will likely prioritize growth over fiscal consolidation by boosting spending, according to economists surveyed ahead of Tuesday’s presentation of the nation’s Union Budget.
Finance Minister Nirmala Sitharaman will probably increase the budget by about 14% year-on-year to Rs 39.6 lakh crore ($527 billion) in the fiscal year beginning April, according to the median of estimates compiled by Bloomberg. She is expected to leave tax rates largely unchanged, and instead rely on income from asset sales and a near-record borrowing of about Rs 13 lakh crore to partly fund the plan, the survey showed.
Elevated expenditure will, for yet another year, keep the government’s budget deficit wider than 6% of gross domestic product. Economists predict Sitharaman will target a fiscal gap of 6.1% of GDP next fiscal year after ending the current year with a 6.8% shortfall, thanks to looser spending to see the economy through the pandemic.
“The recovery from the pandemic has been swift but incomplete,” Dhiraj Nim and Sanjay Mathur, economists at Australia & New Zealand Banking Group Ltd. wrote in a report. “A fine balancing act between fiscal retreat and economic recovery is thus needed.”
With curbs to stem the omicron variant of Covid-19 fanning unemployment and inequalities, Sitharaman will be under pressure to step up spending on everything from infrastructure projects to health care in a bid to create jobs and pull people out of poverty. Oxfam is recommending the government impose a 1% surcharge on the richest 10% of the population to invest in health and education.
Wealth has surged for the rich globally during the pandemic as the value of everything from stock prices to crypto and commodities has jumped. India, where urban unemployment jumped close to 15% last May and food insecurity worsened, now counts more billionaires than France, Sweden and Switzerland combined, according to Oxfam.
Most survey participants see Sitharaman desisting from any populist steps in the budget despite the ruling Bharatiya Janata Party heading into key state elections next month, even as expectations are growing that she will change some tax rules to boost foreign demand for India’s sovereign debt.
Scrapping the capital gains tax on bond investors will advance India’s case for inclusion in global bond indexes, which HSBC Holdings Plc estimates could pave the way for as much as $40 billion of foreign inflows. It can also ease domestic pressure given expectations of near-record borrowing by the government just as the central bank winds back some of its pandemic-era monetary stimulus.
Most respondents see the manufacturing sector emerging as the biggest beneficiary of the budget, with few economists expecting any major gains for the country’s dominant services and agriculture sectors. At the same time, they think it’s the poor who would benefit the most from the government’s growth-boosting policies.
The budget will continue to support the rural sector “via employment generation and higher fertilizer subsidies,” said Gaura Sen Gupta, an economist with IDFC First Bank Ltd. in Mumbai. “The focus of fiscal policy will shift from near-term relief measures to strengthening engines of growth — consumption and investment,” she said.