India has faced its worst year in terms of data, being badly affected by the Covid-19 pandemic. Economic activity declined sharply from the early months of the pandemic till June, after which it gradually improved after September. India has been fortunate in that it has not faced a second wave of Corona like other European countries and some East Asian countries.
Real GDP is expected to contract by 7 to 8.5 percent in FY21, which will be the lowest GDP rate in India’s history. Given a favorable base effect and a return to economic activity, real GDP is expected to grow by 8-9 percent and nominal GDP by 12.5-13.5 percent in the next year. Despite the return to economic activity, there are many sectors, especially in services, which are still badly affected. These include hospitality, tourism, restaurants, entertainment and aviation.
Our primary expectation from the budget is that it should be growth-oriented. The economy needs massive investment to create jobs and generate employment. The investment cycle had actually slowed down even before the pandemic, but now it is showing some good signs, as the pent-up demand of the last two years and the government’s efforts to promote manufacturing and attract companies like the supply chain have helped it. Due to this, many companies are changing their strategy and working on the China + 1 model.
Going forward, we may see more stimulus and incentives for capital expenditure in an effort to boost the manufacturing base, which is a large job provider. Ideally, construction, affordable housing, real estate (including commercial), tourism, infrastructure (especially roads, railways) should receive fiscal incentives, given that these are the sectors that have the largest multiplier effect.
Other sectors that need attention are MSMEs, it is estimated that there are about 6.5 lakh small enterprises in India, which is the second largest job provider after agriculture. It is important to formulate policies to help revive the growth of such key MSMEs, which are in the supply chain to large companies.
Now that we are moving towards a new cycle, the capital expenditure of the central government will have to be increased from Rs 4 lakh crore to Rs 5.5 lakh crore to create the necessary initial momentum. Allocations will also have to be made to the states as most of the spending on infrastructure is done at the state level.
Given the challenge of achieving the challenging gross fiscal deficit target, a lot of balance will have to be maintained in the total expenditure. The fiscal deficit may cross 5 percent in FY 2022 (it may be 7.5 percent in FY 2021, while the budget target was 3.5 percent.) The combined fiscal deficit of the states and the Center may reach 11 to 12 percent in FY 2022.
(Author – Kumaresh Ramakrishnan, CIO (Fixed Income), PGIM India Mutual Fund, gives his views on the budget.)
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