Macroeconomy

India’s budget plans could boost growth

India’s budget plans could boost growth

Dong Chen, Senior Asia Economist, Pictet Wealth Management

India’s budget plans could boost growth

India’s latest budget for fiscal year (FY) 21-22 is highly expansionary. A highlight of the new budget is the sharp increase in government-sponsored infrastructure investment, with capital expenditure set to increase by 35% over the current fiscal year. After a record deficit of 9.5% of GDP in the current fiscal year, the new budget could lead to a fiscal deficit of 6.8% in fiscal year 21-22 (which runs from 1 April 2021 to 31 March 2022).

The aggressive fiscal expansion set out in the FY21-22 budget is obviously a reaction to the unprecedented damage caused by the pandemic. The economy has recovered rapidly since the government started to lift stringent national lockdown measures introduced in March 2020. The expansionary budget will likely add to the momentum. Following expected contraction of 8.0% in FY20-21, we have been pencilling in 10% GDP growth for India in FY21-22. Even though this is above the current consensus of 9.2%, our forecast may face upside risk in light of the latest budget plans.

The sharp increase in the budget deficit could add to concerns about the Indian government’s long-term fiscal health. At the moment, India’s rating is just one notch above high yield grade for all three of the main ratings agencies. Any further deterioration in India’s economic health and fiscal sustainability could lead India’s sovereign rating being downgraded to junk status.

However, the ratings agencies’ concerns should be alleviated by the strong economic recovery expected for India in 2021. While fiscal deficits could remain high in the coming years, the large proportion of increased expenditure that is being devoted to capital investment should boost India’s growth potential in the long term. In addition, a number of reform measures are likely to be credit positive for the banking and insurance sectors, according to Moody’s. All things considered, we do not expect the rating agencies to downgrade India’s sovereign ratings on account of budget deficit numbers alone. Sustainable growth considerations are likely to be just as important.

However, the relatively upbeat scenario for the Indian economy is not without risk. While the Indian government is pinning its hopes for reviving growth on expanding investment, there remain significant issues that have been a drag of India’s potential for decades. Among these, land ownership rights are is one of the thorniest issues. Prime minister Narendra Modi vowed to solve this problem when he entered office seven years ago, but little progress seems to have been made. With this in mind, it will be important to monitor the risk that infrastructure plans are held up by land disputes and other bureaucratic issues.

Download full article here.

Subscribe
Our views on the economy, markets and trends as a weekly digest, straight to your inbox.

We've sent you an e-mail.
Follow the instructions to confirm your subscription.

I didn't receive an e-mail