BENGALURU: The Indian government will stick to borrowing and spending targets it touted six months ago in its Feb. 1 budget despite a sharp economic slowdown, a Reuters poll of economists found, putting the onus on the Reserve Bank of India to support growth.
An expected fiscal deficit of 4.5% of gross domestic product represents a slight tightening of the purse compared with the fiscal year about to end, at 4.8%.
Growth in Asia’s third-largest economy slowed to 5.4% in July-September from over 8.0% on average last fiscal year, more evidence the government’s attempts to kick-start private investment and job creation with infrastructure have not yielded sustainable results.
A failure to create enough well-paying jobs in a country of around 1.4 billion people, where the majority are under the age of 30, has restrained household consumption.
Hopes remain the government will increase spending on agriculture, which employs nearly half the workforce, and also cut income tax, which is paid by only a tiny percentage of citizens.
Economists in a Jan. 22-27 Reuters poll expected New Delhi to stick to its fiscal deficit target of 4.5% of GDP, with gross borrowing forecast at 14.28 trillion rupees ($165.53 billion), median forecasts showed.
“With a high public debt-to-GDP ratio and significant debt servicing costs there is little room for fiscal leniency,” said Dhiraj Nim, economist at ANZ.
India’s federal and state government debt combined is nearly 80% of GDP - above most similarly rated emerging economies - which the government aims to reduce to at least 60%.
So the focus has already turned to what the RBI’s new governor, Sanjay Malhotra, will do.
“The onus to support growth is on monetary policy. But again it is also not without constraints because if the rupee continues to weaken, imported inflation may soon become an issue. So what you may end up with is a shallower rate cutting cycle than the economy needs,” Nim added.
A strong majority of economists expect the RBI to cut its key interest rate by 25 basis points to 6.25% at the Feb. 5-7 meeting.
One more is likely to follow, but with the rupee fell about 3% last year and inflation running above the mid-point of the RBI’s target, it is unclear how many cuts policymakers will be able to deliver.
Consumer spending still weak
Consumption, which accounts for about 60% of GDP, is casting a shadow, with weak sales across sectors from tea to two-wheelers.
Asked whether the government would announce measures to boost spending on Feb. 1, all but three of the 42 economists in the poll said yes, with most citing income tax cuts as the most likely measure.
“Lowering personal income tax rates to boost flagging consumption … may be tricky. The benefit of that would only be felt by a small proportion of the population,” said Pranjul Bhandari, chief India economist at HSBC.
“We believe the government should be opportunistic and cut energy taxes. That would impact a larger number of people and business activity positively.”
Nikhil Gupta, chief economist at Motilal Oswal, said the government should change its focus to include more households.
“There is … a lot of expectation from the government to boost consumption. This, we believe, is unwarranted. The government needs to focus on improving household income growth rather than consumption,” he said.
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Meanwhile, New Delhi is expected to allocate 11.25 trillion rupees for next fiscal year, or 3.20% of GDP, to more capital expenditure, the survey showed.
Since Prime Minister Narendra Modi came to power in 2014, the government has reduced corporate tax rates, offered incentives to boost manufacturing output and increased infrastructure spending five-fold.
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