India’s finance minister Nirmala Sitharaman Monday unveiled a spending plan of Rs34.83 trillion ($477.16 billion) to lift the country out of the COVID-19 induced economic slump that is expected to see a contraction of about 7.8 per cent in the current financial year.
Clearly, Asia’s third-largest economy is betting big on government spending to bring back GDP growth, jobs, consumer demand and improvements in public health.
Sitharaman’s plan to reboot the economy and capture the pace it needs for a sustainable growth comes with a massive capital expenditure outlay, spanning infrastructure, health care, agriculture, energy, domestic production and exports.
The government will increase capital expenditure to 5.54 trillion rupees in the next fiscal from a revised 4.39 trillion rupees in the current year, although total spending increased by less than 1 percentage point from this year’s revised estimate of 34.5 trillion rupees.
The immediate concern for the government of India is to revive growth and the union budget to a large extent has succeeded in addressing it
Like all other major global economies, India too has little choice, but to spend its way out of the slump and get back to a growth trajectory that supports the livelihoods of its hundreds of millions of people.
However, its impact on India’s public finance, both in terms of revenue augmentation and managing deficits, are going to be huge in terms of long term consequences.
No big change in taxes
While the government has been lagging in revenue collection following the pandemic, the budget has not significantly changed the direct and indirect taxes.
On the revenue side, it relies on a few proposal such as higher customs levies on some imports to boost self-reliance, selling state assets and public sector dividend income. Additionally, Sitharaman plans to raise 1.75 trillion rupees selling state assets.
That leaves a significant revenue gap, which the government is planning bridge through an Rs12 trillion in public borrowing. Clearly, that is going to see a big widening of fiscal deficit for a longer period.
For the current financial year, it is estimated at 9.5 per cent of GDP, for 2021-22 it is projected at 6.8 per cent and it is likely to remain elevated above 5 per cent through 2025 — 26. That simply means the government’s plans of keeping fiscal deficits below 3 per cent will remain a moving target for the near future.
With the big government spending and lower interest rates, equity markets are cheered. However, the bulging fiscal deficits for a longer period along with lower interest rates comes with the risk of higher inflation and pressure on currency.
However, the immediate concern for the government is to revive growth and budget to a large extent has succeeded in addressing it.