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India's economic contraction levels have dropped, and that's a huge positive as the government lines up more liquidity to enter the markets. Image Credit: PTI

New Delhi: 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. 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 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 ($120 billion), or 15 per cent of the economy, to rescue companies and save jobs lost due to the pandemic, adding to global stimulus that has touched $12 trillion.

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

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 per cent as of 10:30am in Mumbai, while the currency strengthened 0.1 per cent versus the dollar.)

Not curtail in a hurry

"As regards the coming year, we need to do an assessment," she said ahead of the next fiscal year's budget due February 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's Kanika Pasricha, who sees the headline fiscal impact at around 1.3 per cent 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.


Total size of India's economic stimulus as of now

Not an immediate concern

"The government spending is important to bring the economy on track and globally, countries are following this route," said Deven Choksey, a strategist at KRChoksey Investment Managers. "The markets are likely to remain flush with liquidity and we can worry about the deficit later."

Countries that resorted to stimulus spending of as high as 20 per cent of their GDP are now resorting to additional taxation, Sitharaman said, adding 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 per cent in the three months ended September, a marked improvement from the June quarter's record 24 per cent 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.

Finance Minister Nirmala Sitharaman addresses during a press conference, in New Delhi
"I'm not sure that I can immediately curtail expenditure. It will have to be a careful balance," says Nirmala Sitharaman. Image Credit: ANI

Cautious going

That prompted the Reserve Bank of India this month to revise its annual outlook for the economy to a milder 7.5 per cent contraction compared with a 9.5 per cent 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.

Both the International Monetary Fund and "the central bank have very clearly seen good recovery happening," Sitharaman said. "A sustained good positive recovery is what I see from the beginning of the next fiscal."