India to boost spending with near-record debt

Big gain: Workers in a production line making suitcase frames in a workshop in the Dharavi area of Mumbai. India’s manufacturing sector is seen emerging as the biggest beneficiary of the impending budget. — Bloomberg

MUMBAI: India, which is set to regain the world’s fastest-growing major economy title, will likely prioritise growth over fiscal consolidation by boosting spending, according to economists surveyed ahead of the presentation of the nation’s federal budget.

Finance Minister Nirmala Sitharaman will probably increase the budget by about 14% year-on-year to 39.6 trillion rupees (US$527bil or RM2.20 trillion) 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 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 gross domestic product (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 US$40bil (RM167.63bil) 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. — Bloomberg