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India is letting go of its budget cuts as it prepares to step up capital investment and implement financial sector reforms to support its struggling economy following a pandemic-induced contraction.
The Bombay Stock Exchange’s Sensex index rebounded Monday with a 5% increase, after Finance Minister Nirmala Sitharaman announced plans for increased public spending, privatization of banks, liberalization of the banking sector. insurance and protective tariff increases in the next fiscal year.
Ms Sitharaman said New Delhi plans to borrow an additional $ 11 billion in financial markets over the next two months to fund a final surge in capital spending before the fiscal year ends on March 31.
New Delhi, she said, would end the year with a budget deficit of 9.5% of gross domestic product – far higher than expected, and well above the 3.5% that had been targeted for the ‘year in February of last year – before pandemic hit India.
The budget push follows fears that New Delhi has been too restrained in its response to the pandemic, amid fears of a downgrade of a rating agency, although Ms Sitharaman has denied that the Premier’s government Minister Narendra Modi had been too careful. In October, the IMF and the World Bank urged rich countries to spend their energy to emerge from the pandemic.
“Everyone advised us to spend more,” Ms. Sitharaman said at a press conference after the budget unveiled. “We have spent, we have spent and we have spent. Otherwise, your budget deficit would not have reached this figure. ”
For the next fiscal year, starting April 1, New Delhi is targeting a budget deficit of 6.8 percent of GDP, raising capital spending to $ 75 billion, up nearly a third from the previous year. last year.
This includes plans to spend $ 13 billion on roads in West Bengal, where Mr. Modi’s ruling party Bharatiya Janata hopes to oust the current state administration in elections scheduled for this year, and $ 15 billion for rail development.
Ms. Sitharaman said the government has mapped out a “budget path” that will see the deficit reduced to about 4.5 percent by fiscal year 2025-2026.
But analysts said the budget represented a decisive policy change.
“Until now, it was quite clear to me that they were concerned about losing their investment rating on sovereign debt,” said Shilan Shah of Capital Economics. “But the [finance ministry] seems to have changed tactics now. Rather than trying to be cautious, he is trying to prop up the economy, which is one way to improve the trajectory of public debt.
However, analysts warn that fiscal expansionism also risks stoke inflation, because it is a recovery already underway.
India’s GDP contracted 24% year-on-year between April and June, when economic activities were limited by a strict coronavirus lockdown. But as restrictions eased, the economy rebounded, with manufacturing activity now returning to pre-pandemic levels, according to IHS Markit, although services are still lagging behind.
The IMF has forecast that India’s GDP will grow by around 11% in 2021, to return to its pre-pandemic level, after contracting 8% in 2020.
Saurabh Mukherjea, managing director of Marcellus Investment Managers, said the expansionary policies “will undoubtedly stimulate the economy – the problem is that it will stoke inflation. You could end up overheating things over the next 12 months. “
In addition to the stimulus, Ms. Sitharaman announced plans to reform the financial sector, including an increase in the ceiling on foreign direct investment in the insurance sector to 79%, from 49% previously, and plans to privatize two banks. ‘State.
The government is considering setting up a special asset management company to combat bad debts is now weighing on state banks, and raising tariffs on a range of items made by small and medium-sized domestic enterprises to protect them from competition.
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