MUMBAI • India is set to swing from being a cautious spender this year to opening the fiscal floodgates as Prime Minister Narendra Modi seeks to pull Asia's third-biggest economy - after China and Japan - back from the worst of the pandemic.
Curbs imposed by the Finance Ministry on more than 80 government departments and ministries earlier in the year to preserve cash were relaxed this quarter.
In addition, this year's budget will be increased from its current 30 trillion rupees (S$543 billion) when new spending plans are announced on Feb 1, according to people familiar with discussions.
The developments will give a boost to much-needed spending to help weather the hit from the coronavirus pandemic.
Government expenditures have barely hit the halfway mark seven months into the fiscal year, which started in April.
The economy entered an unprecedented recession last quarter after lockdowns brought economic activity to a near standstill in the April-June period.
In addition to budget spending, Mr Modi's government has announced measures that it said are worth an additional 30 trillion rupees, or 15 per cent of gross domestic product (GDP), to rescue businesses and jobs.
That package, however, underwhelmed some economists who saw the actual fiscal cost of the steps, which were mostly loan guarantees, at less than 2 per cent of GDP. This compares with direct spending of roughly 3 per cent of GDP on average in other emerging markets, according to S&P Global Ratings.
On top of that, the absence of private investment added to urgency for the government to ramp up spending, which was just 55 per cent of the budgeted amount as of October.
"More spending is actually required. And the more the delay in extra spending, the bigger will be the challenge," said economist Kunal Kundu with Societe Generale Global Solution Centre in Bengaluru. He cautioned, however, that a large increase will be difficult without help from the central bank, given the shortfall in receipts from taxes and asset sales.
The threat of a credit rating downgrade to junk discouraged officials from delivering a more immediate boost to the economy through direct cash handouts to citizens or tax cuts.
India's net government debt will rise to more than 90 per cent of GDP this year from a little over 70 per cent last year, according to S&P Global Ratings, and its combined fiscal deficit will be in double digits this year - factors that have put the nation on the path for a rating cut.
Finance Minister Nirmala Sitharaman said in an interview this month that she would not let worries about a fiscal deficit stop her from spending more. "There is a need, and a clear need, for me to spend the money," she said.
The federal government's budget gap will probably widen to 8 per cent of GDP this year, according to a Bloomberg survey. That will be more than double the targeted 3.5 per cent.
The government expanded its market borrowing plan this year to an unprecedented 13.1 trillion rupees from its planned 7.8 trillion rupees.
High-frequency indicators show that a recovery is taking hold, with the central bank seeing the nation exiting a recession in the current quarter.
The Reserve Bank of India also this month revised its full-year growth outlook to a milder 7.5 per cent contraction, compared with its October estimate for a 9.5 per cent decline.