India’s Budget and Balancing Act
The article below is from our BRIEFINGS newsletter of 11 February 2020
Asia’s third-largest economy released its national budget on February 1, outlining its roadmap for boosting economic performance after several years of slowing growth. We sat down with Goldman Sachs Research’s India Chief Economist Prachi Mishra who shared her views on the budget announcement.
Prachi, what made the budget announcement so important this year, in your view? What were the key issues that policymakers were trying to address?
Prachi Mishra: Last year was a difficult year for the Indian economy, which slowed significantly and sharply. Several market participants, for example, were predicting that India was on an inescapable path toward a hard landing. That’s why there was heightened anticipation about this year’s Indian budget. For their part, Indian policymakers had to perform a difficult balancing act between providing a stimulus to boost growth—with very little fiscal flexibility—against a backdrop of high fiscal deficits, falling gross domestic product growth and rising unemployment.
What are the key takeaways from the budget plan?
Prachi Mishra: While the government’s $428 billion budget lacked a large-scale stimulus program like those we saw in budgets released during the global financial crisis, it outlined a series of measures designed to increase consumption and investment, including a cut in income tax rates, a spending boost to infrastructure and the rural economy, and an increase in bond limits for foreign investors. In our view, it appears policymakers took a calculated risk by maintaining a path to reduce the government’s deficits while at the same time proposing an ambitious spending program.
The success of this balancing act will largely depend on one key factor: the execution of the government’s large-scale privatization plan. The government said it would sell stakes in state-owned companies, including one of the country’s largest insurance companies, with the goal of raising 9% of its gross revenues next year from asset sales. The budgeted increase in asset sales can help balance the twin objectives of macroeconomic stability and growth, but whether or not the government can hit its target is a key concern, given it missed its less ambitious goals last year. What the markets are looking for in the coming weeks is a credible program with greater details, along with concrete steps and timelines so they can have more confidence in the government’s privatization plans.
What is your outlook for growth this year?
Prachi Mishra: The big challenges for the Indian economy continue to be weak private investment, muted monetary transmission and low direct and indirect tax collections. However, we expect the slowdown that began in January 2018 to end soon in response to moderately better global growth, easier domestic financial conditions, increased government spending, improving sentiment and an easing of supply bottlenecks. The main risk to our 2020 and 2021 India outlook is the continued risk aversion and lack of confidence in the domestic financial sector, in addition to global risks.