In its annual budget unveiled on Monday, India showed it was prepared to spend a lot of time extracting its economy from the COVID-19-induced hole it fell into, even if that means racking up more debt to do so. .
Finance Minister Nirmala Sitharaman has announced that the government is increasing spending on health, infrastructure and agriculture, while the cap on foreign investment in the country’s vast insurance sector will also be raised from 49% to 74. %. This will likely attract investment from the United States and European insurers.
Expenses are greater than expected. In addition, unlike previous budgets, the government does not try to pay by raising taxes.
So what was the biggest surprise in the Indian budget? And are there any red flags to watch out for?
What’s wrong with this budget?
Sitharaman fixed the budget deficit – it is the shortfall over expenditure for a given period – for the current year at 9.5% of the size of the economy. That’s far more than the 7.25% expected by a group of economists polled by Bloomberg News, and far more than the 3.5% he estimated at the start of the year – or the 3% required by the law.
The government’s willingness to tolerate a larger budget deficit than in previous years was one of the budget’s most unexpected surprises.
Madan Sabnavis, chief economist at CARE Ratings, even admitted that he, along with other economists, did not expect the government to break its Tory budget targets. “We were wrong!” he told Al Jazeera.
Why is the Indian government ready to break the bank with this budget?
Because the government is trying to revive an economy that is expected to contract to a record 7.7% for the year through March.
For the next fiscal year, which begins April 1, the government has set the deficit at 6.8% and has made it clear that its goal is to bring the budget deficit below 4.5% only by 2025-2026. In other words, the government is finally loosening its purse strings and that is why it could budget that “didn’t make anyone miserable,” says Sabnavis of CARE Ratings.
Are there any red flags here?
Maybe a. To pay for certain capital expenditures, the government relies on its ability to sell some of its assets to raise funds.
He has set a divestment target of 1.75 trillion rupees ($ 23.97 billion). While he typically lacks such goals, if that happens this year, his overall budget calculations could be a long way off.
Brutal. What is the probability that the calculations will fail?
Hard to say, but a potential airbag exists, at least for now.
With the Indian stock market at an all-time high – the S&P BSE Sensex jumped 5% to 48,600.61 after six sessions of losses as the budget approaches – if the government manages to sell one of its assets , the process is likely to give them a fair valuation, rather than requiring them to be sold cheaply as is often the case, Sunil Sinha, senior economist at India Ratings, a unit of Fitch, told Fitch. Al Jazeera.
So where is all this money spent?
Health is a big winner. Sitharaman has allocated 2.2 trillion rupees ($ 30.20 billion) for health care in the next fiscal year as well as 350 billion rupees ($ 4.81 billion) for COVID-19 vaccines (the government will deploy at least two more Indian vaccines, she said), and pledged to allocate more funds if necessary. Sitharaman also announced a new federal health program for which it has allocated around 641 billion rupees ($ 8.80 billion) over the next six years.
Another big winner is infrastructure, with the government allocating 2.87 trillion rupees ($ 39.40 billion) for drinking water supply over the next five years; 3 trillion rupees ($ 41.10 billion) for the electricity sector for the next five years; 1.18 trillion rupees ($ 16.17 billion) for the Ministry of Roads and Highways and 1.1 trillion rupees ($ 15.07 billion) for the railways.
Agriculture is also a high priority sector, with the government announcing an estimated 1.7 trillion rupees ($ 23.29 billion) for rice supply, as well as an increase in the agricultural credit target. to 16.5 trillion Indian rupees ($ 226.05 billion) in the coming year.
Was there anything else that caused the deficit to increase?
The government has also finally put on its balance sheets some of the items it has so far kept out of its books and funded through the backdoor, such as the money it spends on food subsidies. The “sticker shock” of the high budget deficit number is also because of this, Indian Barclays economist Rahul Bajoria told Al Jazeera. Like other economists, he welcomes this approach as a step towards greater transparency.