India to boost government capital spending by a third

By News Desk
February 02, 2023

New Delhi: India’s government on Wednesday vowed to increase capital spending by a third to Rs10tn ($122.3bn) over the coming fiscal year, as it unveiled a business-friendly budget meant to spur growth and please key constituencies ahead of an upcoming general election.

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Nirmala Sitharaman, the finance minister, told parliament India would cut taxes for the “hard-working middle class” and would also reduce the top income-tax rate of 42.7 percent to 39 percent in the last full-year

budget before prime minister Narendra Modi faces voters in April and May of 2024.

“Investment in infrastructure and productivity have a large multiplier impact on growth and employment,” Sitharaman said in a speech interrupted by chants of “Modi, Modi” from ruling Bharatiya Janata party MPs and shouted heckling by the opposition.

“After the subdued period of the pandemic, private investments are growing again,” she said. “The budget takes the lead once again to ramp up the virtuous circle of investment and job creation.”

Later Modi described the middle class as “a huge force in fulfilling the dreams of a prosperous and developed India”.

India has been one of the world’s fastest-growing large economies over the past year, in part because of resilient demand from its big domestic market.

The government this week forecast economic growth of 6 percent to 6.8 percent in the fiscal year starting in April, down slightly from 7 percent projected for 2022-23.

“It’s actually a dream budget of sorts in that both capex sizes have been increased and taxes have been reduced,” said Vasudev Jagannath, head of sales at IIFL Capital. “That will lead to better consumption demand.”

Sitharaman said India was targeting a lower fiscal deficit for the coming year of 5.9 percent of gross domestic product, down from 6.4 percent in the current one.

The Federation of Indian Chambers of Commerce and Industry said the budget was “not only significant for the domestic audience, but it truly makes a move towards placing India as the world’s growth engine”.

“Spending on physical infrastructure raises the productive capacity of the economy, has higher multiplier and crowds in private investment,” said Dharmakirti Joshi, chief economist with Crisil, a local subsidiary of rating agency S&P Global. “Construction activity is still quite labour-intensive in India, so it also creates jobs.”

India, which was hit hard by Covid-19, emerged from the peak of the pandemic in better financial shape than some other leading economies, in part because it did not spend as heavily as most on stimulus relief.

“The government never overspent like the US or the UK during the pandemic, but spent money where it was required,” said Madan Sabnavis, chief economist at Bank of Baroda. “They are committed to the fiscal prudence path, have reduced subsidies, and are focused a lot on capital expenditure.”

India’s government is now trying to capitalise on global manufacturers’ diversification away from China to attract more foreign investment. Mobile-phone makers Apple and Samsung have both increased the size of their supply base in India recently, but rely heavily on imported parts.

Sitharaman said India planned to “provide relief” on customs duty on the import of certain parts and inputs used in them, such as camera lenses.

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