India to Borrow Big for Nearly Half-Trillion Dollar Budget

(Bloomberg) -- India unveiled a spending plan worth almost a half-trillion dollars as Prime Minister Narendra Modi’s government seeks to dig Asia’s third-largest economy out of a pandemic-induced slump.

Fueled by a bigger-than-expected spending deficits and borrowing, as well as sales of government assets and dividends from state firms, the 35 trillion rupee ($480 billion) budget sent bonds tumbling and stocks rallying. It also aims to bolster the nation’s financial stability, including setting up a company to manage a growing pile of bad loans.

The federal spending plan, delivered by Finance Minister Nirmala Sitharaman on Monday, is among India’s most highly anticipated and closely watched annual events, and more so this year as Modi’s government seeks to recover from the country’s deepest-ever recession.

The minister more than doubled the outlay for health care in the wake of the pandemic, while also keeping the focus on attracting investments and growing businesses. She proposed increasing the foreign investment cap in insurance to 74% from 49%, planned to set up separate firms to manage stressed debt held by banks and to buy investment-grade bonds to boost confidence in the nation’s corporate debt market.

The new budget also comes as the nation’s financial sector faces increasing pressure from an expected record level of bad loans this year, escalating border tensions with China and widespread anger from farmers, whose protests against market reforms overwhelmed parts of the capital New Delhi last week.

It will be followed by the Reserve Bank of India’s rate decision Friday, with expectations for policy makers to possibly resume rate cuts as inflation cools.

“The government is fully prepared to support and facilitate the economy’s reset,” Sitharaman said. “This budget provides every opportunity for our economy to rise and capture the pace it needs for a sustainable growth.”

The fiscal deficit next year is expected at 6.8% of gross domestic product, Sitharaman said. That’s wider than the 5.5% forecast in a Bloomberg survey. The deficit will be 9.5% for the current year, against a planned 3.5%, she said.

The administration will borrow about 12 trillion rupees to meet the shortfall, less than the record this year but below the expected 10.6 trillion rupees estimated in a Bloomberg survey before the budget was released.

Sitharaman had pledged before Monday that the government would look beyond fiscal deficits in its aim to revive Asia’s third-largest economy, which is expected to outpace the global recovery.

India’s predicament isn’t unique: Other emerging-market heavyweights are also seeing their fiscal deficits balloon as they buttress their economies against the pandemic. China’s deficit is projected to rise to 11.8% for 2020 and 11% for 2021, according to International Monetary Fund data, while Brazil’s is seen at 14.5% for 2020 before reverting to its pre-pandemic level of 5.9% this year.

What Bloomberg Economics Says...

“Sitharaman’s budget announcement surprised the markets with fiscal stimulus that was sharply higher than expected for the year ending in March and the following fiscal year. It marks a reversal of the fiscal contraction in recent years that had driven a slowdown even before the virus hit.”

-- Abhishek Gupta, India economist

For the full note, click here

The government will increase capital expenditure -- the spending to create new assets -- to 5.54 trillion rupees, from a revised 4.39 trillion rupees, although total spending increased by less than 1 percentage point from this year’s revised estimate of 34.5 trillion rupees.

The yield on the most-traded 2030 note rose 12 basis points. Benchmark stocks in Mumbai advanced more than 5%, buoyed by a broad swath of firms, from banks and real estate firms, to road builders, automakers and airlines.

“There seems to be focus on quality of expenditure,” Anubhuti Sahay, head of South Asia economic research at Standard Chartered Bank Plc, referring to allocations for health and infrastructure. “This approach in our view can help the economy to recover faster than expected.”

Sitharaman plans to raise 1.75 trillion rupees selling state assets, including in Life Insurance Corp. of India, with some of the divestment plans carried over from the current year after the pandemic disrupted their sales.

The government’s annual economic report card, released Friday, forecast an 11% rebound in the coming fiscal, following an estimated 7.7% contraction in the current year.

©2021 Bloomberg L.P.

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