Making virus crisis budget, India needs to spend, funds may fall short

  • >> Reuters
    Published: 2021-01-14 16:24:09 BdST

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A man walks along a wall overlooking the central Mumbai's financial district skyline, India, March 9, 2017. REUTERS

Having fired up hopes for populist measures with talk of delivering a “budget like never before”, India’s Finance Minister Nirmala Sitharaman will need to find credible sources for additional revenue from a pandemic sickened economy.

Government borrowing is already bumping against the ceiling, revenues are severely dampened and the fiscal deficit is expected to have ballooned on account of pandemic spending.

“It will be hard for the finance minister to find resources. But she will get some help from the economic revival that will likely increase some tax revenue,” said NR Bhanumurthy, economist and vice chancellor at Bengaluru-based B.R Ambedkar School of Economics.

“She has to push hard for non tax revenue such as divestment. The current year was a zero year for divestment.”

Stake sales and privatisation seldom meet targets. The government has raised just over 138 billion rupees out of the 2.1 trillion rupees ($28.72 billion) divestment target for the current year. It expects to end FY21 with not more than 300 billion rupees, according to government officials.

They said, however, that the government could raise over 1 trillion rupees from privatisation of Air India, Bharat Petroleum Corp Ltd, Container Corp. of India and Shipping Corp. of India in the first six months the fiscal year beginning in April.

Though, finding investors national carrier, Air India could be challenging in these restricted travel, COVID-19 times.

A senior government official involved in planning for the 2021/22 budget, which Sitharaman will deliver on Feb 1, rued the revenues lost at the start of the current fiscal year, and doubted they could be clawed back.

“We need a big spending plan but there are few avenues of revenue right now,” the official told Reuters.

India lacks the option to raise larger funds from the market as the central government increased market borrowing by over 50% to fund a COVID-19 relief programme, a second official, also involved in budget planning, said.

Separately, the government is also likely to see a revenue shortfall of 7 trillion rupees this year, which it may have to redress through a new avenue in the coming fiscal year.

“There might be overtures to compensate for this year’s revenue shortfall by an increase in taxation for high net worth individuals as well as sin taxes,” said Radhika Rao, economist at DBS, referencing taxes on items such as tobacco and alcohol.

A third official refused to specify if the government will introduce a COVID-tax or cess but said they were looking at increasing taxes in certain categories but will ensure the burden does not fall on the middle-income citizens.

He said they would also look at imposing additional or higher import duties on high-end electronics.

LONG-TERM BUDGET

Sitharaman in an interview with Reuters in December said she plans to lift spending, otherwise it would completely undermine a government relief programme brought in last year to sustain poor families and small businesses.

Addressing a Confederation of Indian Industry conference last month, Sitharaman also excited expectations for a big-bang budget filled with sops by saying India was set to see a “budget like never before”.

The government would like to use the budget as path to launch three to four years of high growth, said the third official, stressing that the increase in spending would not be taken to unsustainable levels.

“So, all the funds announced would not be for this year. For this year we could have a growth in expenditure for sure, but the funds announced in the budget would be for years ahead.”

The government’s fiscal deficit for the year ending March is expected to be over 7%, and more than double the budgeted estimate.

Given all the uncertainties, economists reckon the government has no alternatives and has to boost spending.

With a population of nearly 1.4 billion, bedevilled by massive income inequality, India needs annual economic growth of over 8% to create enough jobs for the millions of young people joining the labour force each month.

It was falling short before COVID-19 struck. Growth was 6.1% in 2018/19, before dropping to 4.2% in 2019/20 as the pandemic erupted in the last quarter. The government projects the economy will suffer a 7.7% contraction this fiscal year, and private economists projections of double-digit growth in 2021/22 will partly result from the bounce off a low base.

“Hope hinges on the government to increase its spending to revive the private sector sentiment, overall demand and largely private investment,” said Arun Singh, global chief economist at Dun and Bradstreet.