India’s budget runs into trouble as virus strikes back

India’s annual budget in February was lauded by many and raised hopes it would drive a sharp economic revival, but there are now fears that its promise may fall flat as it did not account for a crippling second wave of Covid-19 infections.

The budget aimed to revive Asia’s thirdlargest economy via investing in infrastructure and health care, while relying on an aggressive privatisation strategy and robust tax collections – on the back of projected growth of 10.5% – to fund its spending in the fiscal year.

Finance Minister Nirmala Sitharaman said India would not see such a budget in “100 years”. At the time, a massive Covid-19 vaccination drive and a rebound in consumer demand and investments had put the economy on track to recover from its deepest recorded slump.

The South Asian country is battling the world’s second highest coronavirus caseload after the US, recording some 300,000 cases and about 4,000 deaths a day. With many parts of the country under varying degrees of lockdown, most of the growth projections that the budget was built around are now mired in uncertainty.

The extent of the crisis is even making investors question whether after years of debt accumulation, India once expected to become an economic superpower, still deserves to cling on to its ‘investment grade’ status.

Earlier this week, Moody’s said India’s severe second wave will slow the near-term economic recovery and it could weigh on longer-term growth dynamics. It cut its GDP forecast to 9.3% from 13.7%.

While the government maintains it is too early to revise its own numbers, officials privately concede growth will be much more muted that previously anticipated if social distancing measures continue.

Besides providing 350 billion rupees (RM19.7 billion) in the budget for vaccination costs, the government did not specifically dedicate any funds toward contingencies arising from a second wave and now may have to cut back on some expenses, officials said.

Two senior officials said the privatisation of assets such as oil refiner Bharat Petroleum Corp and national carrier Air India, where processes are well advanced, may now be pushed into early 2022 – some three months later than previously planned.

The delays will affect a series of other privatisation plans including two banks, insurance and energy companies, that are at the centre of reforms proposed by the budget and that are key to achieving the roughly $24 billion (RM99 billion) target from privatisations and asset sales, the officials said.

The crisis is also likely to delay the listing of India’s largest insurer Life Insurance Corp, which was expected to raise $8-10 billion.

Another official said the lockdowns will start affecting tax collections by June, potentially lowering revenues 15-20% from what was estimated for the quarter. – Reuters