India’s budget expectations: Infrastructure promotion, employment, reforms

Nirmala Sitharaman, India’s Minister of Finance, speaks at a press conference at the National Media Center in New Delhi, India, on Monday, November 15, 2021.

T. Narayan | Bloomberg | Getty Images

India is due 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 release details on the budget for the financial year starting on 1 April. Economists expect measures that support growth and also allow the government to reduce its deficits and debt build-up at the same time.

“She will have to find a fine balance between the persistent requests for stimulus for demand, continued investment pushes and fiscal consolidation,” Bank of America economists said in a January 25 note. They pointed out that with a number of Indian states heading for the ballot box as early as February, there are some smoldering concerns that the February 1 budget could turn into a populist budget.

“Despite the pressure from the polls, we expect [fiscal year 2023] the Union budget to stick to the reform agenda, “said the economists.

Fiscal deficit

India’s fiscal deficit target for the new year will be closely monitored by investors and rating agencies.

A fiscal deficit is the difference between a government’s revenue and expenditure, and it suggests that the country spends more than its revenues.

India plans to set its deficit target between 6.3% and 6.5% of GDP, local media reported, citing several government officials. That is slightly lower than this year’s target of 6.8%, which Sitharaman previously said was necessary to get the Indian economy back on track after the Covid eruption derailed growth.

Citi analysts said this month that their baseline projections predict a fiscal deficit target of 6.2% of GDP, but they pointed out that it “remains a broad political call.”

“The 60bps in GDP reduction in the fiscal deficit would greatly demonstrate the government’s willingness to return to fiscal discipline and comfort investors this year with possible Global Bond Index inclusion,” they wrote.

Reports say that Indian government bonds could potentially be included in a few global bond indices 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 relatively lower but still high financial deficit target of 5.8% of GDP, while the Japanese investment bank Nomura expects a target of 6.4% of GDP.

“Government fiscal policy since the pandemic began has prioritized 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 continue.”

Tax transparency is where citizens are informed about how the government uses its revenues from tax revenues and other sources.

Infrastructure push

Economists expect infrastructure promotion to be one of the main themes in Tuesday’s budget.

This comes amid signs that investment demand in the country may finally rise, while pent-up consumer demand is waning.

Last year, India said it planned to monetize about $ 81 billion of state-owned assets over the next four years to increase infrastructure spending and stimulate growth. The government planned to lease assets such as gas pipelines, roads, railway stations and storage facilities to the private sector to operate, reports said.

The government is also set to announce the state-owned Life Insurance Corporation this year in what is said to be India’s largest listed offering.

“Visible implementation of the capital income pipeline, infra-pipeline and disinvestment plans will be high on the government’s agenda and a key market focus,” said Citi analysts.

Job creation and reforms

Other likely budgetary priorities will include job creation, support for sectors disproportionately affected by the pandemic, banking sector reforms, climate policies, and measures for the health and education sectors, according to economists.

While India’s national unemployment has risen back to pre-pandemic levels of around 7%, it is accompanied by a lower employment rate and employment rates that are below the early 2020 levels, according to Radhika Rao, senior economist at Singapore’s DBS Group. It pointed to the absence of a broad improvement in working conditions, she said in a note this month.

“When this is equated with the faster recovery of formal jobs versus informal jobs and the dominance of random labor (lack of safety nets) as well as the self-employed in the workforce, the negative impact on income and purchasing power becomes apparent.” said Rao.

“While agricultural jobs were slightly changed, manufacturing followed by service sectors is still below pre-pandemic levels,” she added.

The government needs policies to revive and support micro, small and medium-sized enterprises, which are the largest job creators in India, according to Rumki Majumdar, an economist at Deloitte.

“Identifying their areas of pain and devising a solution to help them become part of ‘Atmanirbhar Bharat’ will help their recovery,” she wrote. Atmanirbhar Bharat is a campaign that is part of the government’s political push to make India more self-reliant.

“In addition, access to credit is critical and consideration should be given to providing targeted credit support to these companies,” Majumdar added.

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