India to spend money despite widening fiscal gap

Economic stability: The Reserve Bank of India has cut interest rates by 115 basis points so far this year, besides injecting billions in liquidity and ensuring financial stability. — Bloomberg

MUMBAI: India will not worry about missing its budget deficit target as it seeks to step up spending to support the economy, Finance Minister Nirmala Sitharaman said.

The stimulus spending won’t be wound down in a hurry, she said in an interview to Bloomberg TV.

The government and the central bank together have done a good balancing act, she added.

“For the present, I’m not going to allow the fiscal deficit number to worry me because there is a need, and a clear need, for me to spend the money, ” Sitharaman (pic below) said.

Sitharaman, who reviews government expenditure every 15 days, said she will will push state firms to accelerate spending.

Prime Minister Narendra Modi last month expanded support measures to 30 trillion rupees (US$120bil), or 15% of the economy, to rescue companies and save jobs lost due to the coronavirus pandemic, adding to global stimulus that has touched US$12 trillion.

Economists see the additional spending, along with falling tax revenue, pushing India’s budget gap wider to 8% of gross domestic product (GDP) in the current financial year, more the double the targeted 3.5%.

Stocks and the rupee gained after the minister’s comments, while sovereign bonds were steady.

The S&P BSE Sensex added to early gains, advancing 0.6% as of 10:30am in Mumbai, while the currency strengthened 0.1% versus the dollar.

“As regards the coming year, we need to do an assessment, ” she said ahead of the next fiscal year’s budget due Feb 1.

“I’m not sure that I can immediately curtail expenditure.

“It will have to be a careful balance because the momentum that the economy gains should be sustained.”

India’s economic support package mostly comprises of loan guarantees to businesses, with the actual fiscal cost for the government seen as much less, according to economists including Standard Chartered Plc’s Kanika Pasricha, who sees the headline fiscal impact at around 1.3% of GDP.

India also raised its borrowings target for the year to March to a record 13.1 trillion rupees.

S&P Global Ratings and Fitch Ratings previously said their assessment of India’s sovereign score hasn’t been altered by the economy’s additional borrowings.

Countries that resorted to stimulus spending of as high as 20% of their GDP are now resorting to additional taxation, Sitharaman said.

She added that the Modi government’s measures were working well for India, and helping fuel a recovery in the economy – which is currently in a recession.

India’s GDP shrank a less-than-expected 7.5% in the three months ended September, a marked improvement from the June quarter’s record 24% contraction.

A slew of high-frequency indicators also suggests a gradual recovery in activity across services and manufacturing sectors – the key engines of the economy, which is now in a recession.

That prompted the Reserve Bank of India (RBI) this month to revise its annual outlook for the economy to a milder 7.5% contraction compared with a 9.5% drop seen in October. The RBI, on its part, has cut interest rates by 115 basis points so far this year, besides injecting billions in liquidity and ensuring financial stability. — Bloomberg

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