India likely to prioritize growth through spending: Economists

With the presentation of the National Budget around the corner, India is likely to prioritize growth by boosting spending. The Finance Minister will probably increase the budget by about 14% year-on-year to Rs 39.6 trillion in the fiscal year beginning April.

According to Bloomberg estimates, Nirmala Sitharaman will leave tax rates largely unchanged and rely on income from asset sales and a near-record borrowing of about Rs 13 trillion to partly fund the plan. The survey says that elevated expenditure will keep the government’s budget deficit wider than 6% of gross domestic product.

However, economists believe Sitharaman will target a fiscal gap of 6.1% of GDP next fiscal year after ending the current year with 6.8% shortfall. Dhiraj Nim and Sanjay Mathur, economists at Australia & New Zealand Banking Group Ltd, said recovery from the COVID-19 pandemic has been swift but incomplete. They highlighted that the need of the hour is a fine balancing act between fiscal retreat and economic recovery.

Moreover, Oxfam is recommending the Indian government to impose a 1% surcharge on the richest 10% of the population to inject 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,” it said. “India, where urban unemployment jumped close to 15% last May and food insecurity worsened, now counts more billionaires than France, Sweden and Switzerland combined.”

Furthermore, expectations are also growing for Sitharaman to tweak some tax rules to boost foreign demand for India’s sovereign debt. The survey states that scrapping capital gains tax on bond investors will advance India’s case for inclusion in global bond indexes. HSBC Holdings Plc estimates that this could lead the way for as much as $40 billion of foreign inflows. It can also ease domestic pressure.

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The survey highlighted the manufacturing sector as the biggest beneficiary of the budget. Few economists see major gains for India’s dominant services and agriculture sectors. It will be the poor who will benefit the most from the government’s growth-boosting policies.