© Reuters. A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad, India, September 20, 2018. REUTERS/Amit Dave/Files
By Vivek Mishra
BENGALURU (Reuters) – The Indian government will meet its deficit target for the coming fiscal year, according to a Reuters poll of economists who were split on whether New Delhi would undertake all the capital spending it is planning, the most ever.
Since taking office in 2014, Prime Minister Narendra Modi’s government has broadly stuck to its borrowing targets but has come under sharp criticism for not creating enough jobs, especially for young people.
Of 39 economists who responded, 34 said the government could achieve Finance Minister Nirmala Sitaraman’s fiscal deficit target for the 2023/24 fiscal year, 5.9% of gross domestic product (GDP). That would be down from an expected 6.4% in the current fiscal year, ending on March 31.
The remaining five economists who stated the government would fail to meet that target said the fiscal deficit would be in the range of 6.0% to 6.2%.
A key government objective is to bring the deficit down to 4.5% of GDP by 2025/26. Respondents were evenly split on whether it would succeed.
GRAPHIC: Reuters Poll – India Fiscal Deficit- https://fingfx.thomsonreuters.com/gfx/polling/zdvxdnqjqvx/Reuters%20Poll%20-%20India%20Fiscal%20Deficit.png
The government also announced on Feb. 1 planned record capital expenditure of 10 trillion Indian rupees ($120 billion) for the coming fiscal year, more than the 8.85 trillion expected in a Reuters poll before the budget.
But only half of 38 respondents in the Feb. 1-3 poll said the government would meet that spending target. Among those who said it would not, some argued the economy would slow as a series of 2022 interest rate hikes take hold and curb the government’s spending power.
“Are the budget numbers overly optimistic? On the margin, we think yes. We expect growth to slow materially in FY 2023/24…(which) means tax revenues are likely to disappoint,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura.
“The government can still meet its 5.9% deficit target, but it will have to cut back on its projected capex target.”
Six economists, who answered a follow up question, expected capex to fall short of budget estimates by a median of 1.25 trillion rupees.
GRAPHIC: Reuters Poll – India Capex- https://fingfx.thomsonreuters.com/gfx/polling/movaklwbqva/Reuters%20Poll%20-%20India%20Capex.png
Over the past three years, New Delhi has nearly doubled its capital spending. But it has failed to meet its budget capex target four times over the past nine years and looks like falling short of this fiscal year’s 7.5 trillion rupee target.
This is supposed to have promoted employment, but there has been little sign of the lift in public capital spending promoting a matching increase from the private sector.
When asked if the measures announced in the budget would significantly affect job creation next fiscal year, 26 of 37 respondents said the measure would, but much would depend on how they were implemented.
The other 11 said the government was far from significantly affecting employment.
Kunal Kundu, India economist at Societe Generale (OTC:), said, “Job creation is unlikely to be of the scale needed.”
“The stress in the labour market is very clear, because, despite a much lower labour force participation rate, we still have a pretty elevated unemployment rate,” Kundu said.
The unemployment rate was 7.14% in January, according to the Centre for Monitoring Indian Economy, a think tank.
($1 = 82.2060 Indian rupees)
New Delhi is planning to meet its fiscal target for the coming year, in a move that will be encouraging in times of economic uncertainty. It has been reported that the government has taken steps to ensure that its revenue targets are achieved, although there has been some doubt whether its capital expenditure goals could be realized.
The Indian government has been trying to strengthen its fiscal position in 2021, as the economic impact of the pandemic continues to be felt. This includes taking a series of measures to improve revenue collections, such as expanding the tax base, increasing digitalization of financial transactions, and introducing taxes on certain services. Additionally, the Finance Minister has targeted raising spending to spur growth, although some analysts have questioned whether these goals can be achieved.
The government is aiming to have a lower than expected fiscal deficit of 6.8% of GDP in 2021-22. This would be a significant decrease from the 8.6% it was estimated to be in the previous year. The government has said that it hopes to make up for some of the lost revenue by increasing tax compliance and boosting capital expenditure.
Capital expenditure, or investment in physical assets, is seen as a key driver of economic growth. However, it is uncertain whether the government will be able to meet its target of spending 1.5 trillion rupees in 2021-22. This figure would be 8% higher than the previous year, which is a challenging goal in these uncertain times.
Analysts have stressed that it is essential that the government is able to make progress in this area, as this would have a positive impact on job creation, economic growth, and the investment climate in India. The government has taken steps to make this happen, including announcing a host of infrastructure projects and launching new financing schemes to support them. Whether these measures will be enough to spur growth remains to be seen.
It is clear that the government is keen to meet its revenue and expenditure targets for the coming year. Whether the capital expenditure goal can be achieved is yet to be seen, but it is very likely that New Delhi will be able to meet its revised fiscal target.