Public Debt in India

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2021–2022 budget seeks to support medium-term growth, while reining in the deficit

On 1 February, the government unveiled its union budget for fiscal year 2021, which runs from April 2021 to March 2022. Public spending is seen increasing 1.0% compared to FY 2020—which would mark the slowest rise in spending on record—while revenues are seen growing strongly as the economy recovers from the blow dealt by the pandemic. The net result is estimated to bring about a still-large budget deficit—the second deepest since at least 1990—but much narrower than FY 2020’s record shortfall. Most notably, the government aims to ramp up its capital expenditure (capex) to support the supply side of the economy, and consequently medium-term growth prospects.

Spending for FY 2021 is forecast at INR 34.8 trillion or 15.6% of GDP (FY 2020 revised figure: INR 34.5 trillion), with revenue at INR 19.8 trillion (FY 2020 revised figure: INR 16.0 trillion). Looking at individual spending areas, infrastructure expenditure should see a large boost relative to FY 2020 as capex’s share of total spending is seen rising to 16.0% from 13.0%. The budget deficit is expected to narrow to 6.8% of GDP from a projected 9.5% of GDP this year: Both figures are broadly in line with our panelists’ predictions. Moreover, the budget is based on assumptions of nominal GDP growth of 14.4%.

Overall, next year’s budget should add some impetus to economic growth as India’s economy is poised for an automatic rebound in activity following what will go down as the sharpest economic contraction since its current GDP records began back in 1966. Moreover, the government looks set to carry on with its structural reforms and target medium term growth, which should provide a meaningful boost to economic activity over the next couple of years. However, a patchy track record of implementing reforms and a still-massive infrastructure gap pose downside risks to the outlook.

Commenting on the union budget’s outlays in the closing months of FY 2020, analysts at Nomura noted:

“In our opinion, the government’s decision to accelerate spending, a volte-face from its earlier strategy, reflects its view of higher multiplier effects during the unlock phase and higher growth as a pre-condition for debt sustainability. Its revised targets suggest government spending will be frontloaded and rise by 55-60% y-o-y in the final quarter of FY20 (Jan-Mar 2021).”

On the outlook for next fiscal year, Pranjul Bhandari, chief India economist at HSBC, commented:

“With the expenditure and the fiscal deficit ratios falling in FY21, it seems at first glance that the fiscal impulse is negative. But this does not account for the improvement in the quality of expenditure. Indeed, we find that fiscal multipliers of capex far

exceed that of current expenditure. With capex rising (by 0.2% of GDP in FY21 and 0.6% of GDP in FY20), the growth impact may well be positive over a two-year horizon, even with a 2.3% of GDP fall in current expenditure in FY21.”

FocusEconomics Consensus Forecast panelists see the fiscal deficit reaching 6.2% in FY 2021, before narrowing to 5.5% in FY 2022.