Hey big spender: What is the biggest surprise in India’s budget?

In its annual budget unveiled on Monday, India showed it is ready to spend big to dig its economy out of the COVID-19-induced hole it has fallen into.

Indian Finance Minister Nirmala Sitharaman announced investments in healthcare, agriculture and infrastructure [Anushree Fadnavis/Reuters]
Indian Finance Minister Nirmala Sitharaman announced investments in healthcare, agriculture and infrastructure [Anushree Fadnavis/Reuters]

In its annual budget unveiled on Monday, India showed it is ready to spend big time to dig its economy out of the COVID-19-induced hole it has fallen into, even if it means racking up more debts to do it.

Finance Minister Nirmala Sitharaman announced the government is boosting spending on healthcare, infrastructure and agriculture, while the cap for foreign investment in the country’s vast insurance sector will also be lifted from 49 percent to 74 percent. That’s likely to attract investment from the United States and European insurers.

The outlays are bigger than expected. Moreover, unlike with past budgets, the government is not trying to pay for it by increasing taxes.

So what was the biggest surprise in India’s budget?  And are there any red flags to watch out for?

What is the big deal with this budget? 

Sitharaman pegged the fiscal deficit – that’s the shortfall in income compared with expenditure for a given period – for the current financial year at 9.5 percent of the size of the economy. That is far higher than the 7.25 percent expected by a group of economists surveyed by Bloomberg News and a lot higher than the 3.5 percent it had estimated at the start of the year – or the 3 percent required by law.

The government’s willingness to tolerate a wider fiscal deficit than in previous years was one of the most unexpected surprises in the budget.

Madan Sabnavis, chief economist at CARE Ratings, even acknowledged that he, along with other economists, didn’t expect the government to bust its fiscally conservative targets. “We got it wrong!” he told Al Jazeera.

Why is India’s government willing to break the bank with this budget?

Because the government is trying to revive an economy that is expected to contract to a record low of 7.7 percent for the year through March.

For the next financial year, which starts April 1, the government has pegged the deficit at 6.8 percent and has clearly stated that its aim is to get the fiscal deficit under 4.5 percent only by 2025-2026. In other words, the government is finally loosening its purse strings and that’s the reason it could draw up a budget that “didn’t make anyone unhappy,” says CARE Ratings’ Sabnavis.

Are there any red flags here?

Perhaps one. To pay for some investment spending, the government is banking on its ability to sell off some of its assets to raise money.

It has set a divestment target of 1.75 trillion rupees ($23.97bn). While it usually misses such targets, if that happens this year, then its entire fiscal math could be way off.

Brutal. How likely is it that the maths will be off?

Hard to say, but one potential airbag exists, at least for now.

With the Indian stock market at all-time highs – the S&P BSE Sensex jumped 5 percent to 48,600.61 after six sessions of losses in the run-up to the budget – if the government can manage to sell off any of its assets, the process is likely to fetch them a fair valuation, rather than requiring them be sold for cheap as is often the case, Sunil Sinha, principal economist at India Ratings, a Fitch unit, told Al Jazeera.

So where is all that money being spent?

Healthcare is a big winner. Sitharaman has allocated 2.2 trillion rupees ($30.20bn) for healthcare in the upcoming financial year as well as 350 billion rupees ($4.81bn) for COVID-19 vaccines (the government will roll out at least two more Indian vaccines, she said), and has promised to allocate more funds if needed. Sitharaman also announced a new federal health scheme for which she has earmarked around 641 billion rupees ($8.80bn) over the next six years.

Another big winner is infrastructure, with the government allocating 2.87 trillion rupees ($39.40bn) for clean water supplies over the next five years; 3 trillion rupees ($41.10bn) for the power sector for the next five years; 1.18 trillion rupees ($16.17bn) to the ministry of roads and highways and 1.1 trillion rupees ($15.07bn) for railways.

Agriculture, too, is a high-priority sector with the government announcing an estimated 1.7 trillion rupees ($23.29bn) for paddy procurement as well as an increase in the agriculture credit target to 16.5 trillion Indian rupees ($226.05bn) in the year ahead.

Is there anything else that has driven up the deficit?

The government has also finally brought on its balance sheets some of the items that it has so far kept off its books and funded through the back door, such as money it spends on food subsidies. The “sticker shock” of the high fiscal deficit number is because of that as well, Barclays India Economist Rahul Bajoria told Al Jazeera. He, like other economists, welcomes the step as a move towards greater transparency.

Source: Al Jazeera

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