India's flagging economy is not out of the woods yet, and the government is expected to introduce more measures to help boost slowing growth. However, the widening gap between New Delhi's revenue and its expenditure is limiting the scope of policy tools at its disposal that can effectively rejuvenate the third-largest Asian economy, analysts say.
“The government has already declared and implemented many stimulus measures,” says VK Vijaykumar, the chief investment strategist at Geojit Financial Services, headquartered in Kochi, Kerala. “More can be expected. But, unfortunately, the government has limited wiggle room for concessions, which might worsen the already precarious fiscal deficit.”
India's economic growth slowed to a more than six year-low of 4.5 per cent in the quarter to the end of September 2019, according to government data. That compares to 7 per cent is the same period a year earlier.
Fitch Ratings last month cut its growth forecast for India to 4.6 per cent from the previous 5.6 per cent estimate for the current financial year, which runs until the the end of March, citing “a squeeze in credit availability from non-banking financial companies and deterioration in business and consumer confidence”.
“Everything worsened for India during 2019,” says Sujan Hajra, chief economist at Anand Rathi, a financial services company based in Mumbai. “As of now, with whatever data we have, that doesn't draw a pretty picture for India's growth, and doesn't show an impending recovery.”
He adds: “government finance is likely to be a bigger problem in 2020 than in 2019 because clearly the government's idea to boost growth implies that it has to give stimulus rather than increase taxes or cut spending".
New Delhi has already taken a series of steps in recent months as policy makers try to revive the country's sluggish economy.
On New Year's Eve, the government unveiled a $1.4 trillion (Dh5.14tn) infrastructure plan that includes the development of rural infrastructure, airports, roads, and ports in the country, a move, policy makers say, is aimed at realising prime minister Narendra Modi's vision of India becoming a $5tn economy in the next five years.
In September, India slashed corporate tax rates to 22 per cent from 30 per cent within weeks of announcing stimulus packages to help the ailing car and property sectors.
But what has been done is far from enough and economists expect more packages to come from the government in the short term.
“A cut in personal income tax is expected,” says Mr Vijaykumar. “This can help boost consumption. A complete reform of capital market-related taxation is also expected.”
There are, however, questions on the government's ability to foot the bill for such costly measures.
India's fiscal deficit - which is the gap between the government's revenues and how much it spends – widened to more than 8 trillion Indian rupees (Dh409.4bn) in November, compared to its budgeted estimate of 7tn rupees, according to data from the Controller General of Accounts. The government only just managed to hit 50 per cent of its revenue target, which adds to worries that India is likely to breach its fiscal deficit target, 3.3 per cent of the country's gross domestic product for this year.
India's finance minister Nirmala Sitharaman has said the corporate tax cut alone would mean the government taking a 1.45tn rupees hit in revenues annually.
“The deficit slippage is now more concerning as the April to November fiscal deficit crossed the budget estimate by 14.8 per cent,” says Kruti Shah, an economist at Mumbai-based Emkay Global Financial Services.
“The level is at a record-high in comparison with corresponding levels in the prior years. Observing the current level, the probability of fiscal slippage to a level of 3.8 per cent to 4 per cent is very likely within this financial year in our view.”
Escalating tensions between Iran and the US are further fuelling concerns about India's public finances due to its huge dependence on oil imports and the fact that the government often has to absorb sharp increases in fuel prices to soften the impact on the masses. Brent crude prices gained more than 3.5 per cent on Friday following an air strike that killed a top Iranian military commander in Iraq, stoking fears of Iranian retaliation that would increase the risk premium and further hike the crude prices.
Economists, however, point out that it is not all doom and gloom for India as there are some bright spots in the overall picture.
A report in the Economic Times on Friday, for example, cited some retailers and consumer goods companies as saying the festive season between October and December was the best in four years. Weak consumer spending in India has been a major drag on economic growth.
“Some green shoots can be seen, but the coming summer will tell us whether the momentum is sustained,” Manish Sharma, chief executive of Panasonic India, told the newspaper.
Mr Hajra points out that foreign direct investment (FDI) flows into India are also encouraging.
Official data shows that FDI into India rose 15 per cent to $26bn during April to September over the same six-month period in 2018.
These factors have raised hopes that “things have bottomed out”, says Mr Hajra.
Some are even predicting growth to start picking up later this year.
"We expect growth to gradually recover to 5.6 per cent in the financial year April 2020 to March 2021 and 6.5 per cent [the following year] with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term,” according to a Fitch report.
Mahesh Singhi, the founder and managing director of Singhi Advisors, a global investment banking firm in Mumbai, says he is looking forward to the union budget, expected to be presented at the beginning of February, during which the government is likely to make further announcements to spur the economy.
“The wish list ranges from a cut in personal income tax slabs to far-reaching structural reforms including amendments in land and labour laws,” he says.
Government spending, he explains, is much needed to boost consumer confidence.
“Once the outlook for the economy improves people may start spending more, leading to a revival in consumption.”
The International Monetary Fund (IMF), however, has raised another concern about India's economic health, when it pointed to the country's public debt, in one of its recent reports. The Washington-based lender said that while there is a lot of focus on the fiscal deficit, “a broader and more relevant measure of the government’s fiscal position - and its bearing on the economy is the public sector’s borrowing requirement, which has risen to about 8.5 per cent of GDP”.
“Economic development projects and enhanced social initiatives in India will be vital in the coming years,” the IMF said. “But to generate the revenue needed to get them off the ground, India’s debt - among the highest in emerging markets - must be reduced.”
Economists in India, however, say India's debt levels are manageable, and are not particularly high by international standards. The United States, for example, has a government debt-to-GDP ratio of more than 100 per cent.
“India's external debt is low,” says Mr Vijaykumar. “Debt servicing is not an issue at all. Also, foreign exchange reserves at $450bn are ample. Domestic debt is a bit high, but not in dangerous territory. In the context of falling interest rates, debt servicing is easy.”
Jigar Doshi, the executive director, indirect tax, at Nexdigm (SKP), a professional services group in India, says that given the fiscal situation, rather than spending large amounts of money to boost the economy, “it appears that the government would try to encourage investment in India by easing investment norms and reducing red tape in bureaucracy”.
Privatisation of government-owned companies to raise funds is also on the cards.
“The government is keen to further reduce its debt burden and is looking at measures such as raising finances through strategic divestment in certain public sector undertakings,” says Mr Doshi.
The government is planning to make another attempt at selling its debt-laden airline, Air India, this year and it also wants to sell its oil and gas firm, Bharat Petroleum Corporation.
Raising more investment and selling stakes in state-owned companies could help India enormously, analysts say.
“The year 2020 is expected to bring better news for the economy,” says Mr Doshi.