The most significant question that economists, analysts and individuals have in mind as Finance Minister Nirmala Sitharaman presents the federal budget on 1 February is will India be a $5trn economy by 2025.
According to The World Bank, India’s economy reached a size of $3.1trn at the end of 2021 from $2.7trn at the end of 2020. It was at $2.9trn at the end of 2019.
In 2019, Prime Minister Narendra Modi announced that this government would aim to increase the size of the economy to $5trn by March 2025 when he sought re-election to the position in the general elections in that year. Little did he know then that the coronavirus pandemic would strike and turn the equations on the head not just for India but for the whole world.
Governments across the globe have resumed deploying energies to restore economic activity and accelerate the pace of growth after three deadly waves of the coronavirus outbreak which first began in March 2020. Besides ruining the global order and rendering widespread joblessness, decrease in production and consumption, the virus outbreak took a toll of over 1 million and is still counting.
Relief and stimulus
In line with the world, the Indian government announced relief packages initially followed by several billion dollars worth of stimulus packages to help the economy survive the crisis. In the 12 months ended March 2021, or the one whole pandemic-affected financial year, economic growth plummeted to the lowest in over four decades.
The government on its part hasn’t revisited the target of the size of the economy. As late as October 2021, Hardeep Singh Puri, a federal minister in the incumbent government said he was confident the milestone would be reached.
Citing the fuel consumption pattern, he said that diesel and petrol consumption had then already reached above the pre-covid levels and sectors such as pharmaceutical, healthcare and manufacturing were already gathering pace.
Now, the country is watching for the answer. And expects Sitharaman has the answers when she begins her presentation at 11.00 am local time to lawmakers in the Indian parliament.
Global financial services firm Ernst & Young in October 2021 said that India may face a three-year delay at the least in its $5-trillion target. That calculation was, however, before the much-agreed third wave of the coronavirus spread in the December 2021-January 2022 period when the nation reported over 200,000 cases daily.
“Covid’s deleterious impact has postponed the S$5 trillion target for India by at least three years. Improved fiscal performance of the government in FY22 may permit accelerated infrastructure investment, further strengthening growth momentum. Uplifting India’s saving and investment rates may prove to be critical for increasing potential growth to 7% or above in the medium term,” said DK Srivastava, Ernst & Young’s India chief policy advisor.
In October 2021, the former governor of the Reserve Bank of India, the nation’s central bank, said India becoming a $5trn economy by 2025 was impossible and the country’s economy should have grown 9% annually in 2019-2025 period for it to achieve that level.
Pushing the pedal
“We believe Finance Minister Nirmala Sitharaman will continue to push on the fiscal pedal to support the economy. While the fiscal deficit estimate for FY21-22 could be revised upwards modestly, we expect stronger GDP growth to keep the government on the deficit glide path announced in the February 2021 budget,” said Rahul Bajoria, managing director and chief India economist at Barclays.
The leading British bank said that increased welfare spending and production linked incentives (PLI) would remain key priorities that it would watch out for in the budget statement. Prioritising capital expenditure by the government would be crucial for sustained growth revival.
“On the basis of strong recent fiscal trends, we expect a well-rounded budget. We see scope for demand stimulus, continued capital expenditure push, glide path for fiscal deficit, continued efforts to improve budget transparency and potential for tax reforms,” said Bank of America Securities.
The US-based global fund manager and advisor said that after long delays, large transactions now offer higher visibility such as the sale of the state-owned general insurance firm, fuel retailers and banks.
“We believe the underlying theme would be similar to last year wherein the focus would be on increasing capital expenditure in key social sectors like infrastructure, housing and healthcare space. Employment generation and kick-starting the private investment cycle would continue to remain key priorities for the government,” said Ajit Mishra, vice-president for research at Religare Broking in Mumbai.
“At the same time, we also expect the government to begin its fiscal consolidation journey albeit at a gradual pace as it would not want to hamper the ongoing economic recovery. We believe that the budget would be largely growth-driven but it would also lay the path for fiscal consolidation,” he added.