India will seek to narrow its budget deficit next financial year, amid expectations of improved revenue collections and economic rebound, according to Standard Chartered Bank Plc.
Finance Minister Nirmala Sitharaman will likely target fiscal deficit — the gap between income and expenditure — at 5.3% of gross domestic product in the budget for the year starting April 1, the bank’s Chief South Asia economist Anubhuti Sahay wrote in a report to clients. That will be slimmer than the current year’s number, which Standard Chartered expects to be 6.7% of GDP, or even as high as 8.4% if factoring in off-budget spending to help the economy shake off the pandemic fallout.
Although the government announced stimulus steps worth 15% of GDP in the current year, the actual fiscal cost is seen at less than 2% of GDP with most of the measures taking the form of loan guarantees. That compares with direct spending of about 3% of GDP on average in other emerging markets, according to S&P Global Ratings.
The gains will be “driven by improved tax collection, higher divestment proceeds and reduced pandemic-related expenditure amid a better growth environment,” Sahay said. “The fiscal consolidation path for FY22-26 will be keenly watched to assess medium-term market impact,” she said.
Sitharaman, in an interview in December, said she would carefully balance her next budget to ensure the momentum in the economy isn’t lost. There are expectations that India may step up capital spending in the budget to be presented February 1.
“We expect the government to maintain its focus on capex, keeping it at around 2% of GDP versus an average 1.7% in the past five years,” Sahay wrote. That will include inoculation costs to fight the virus.