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If more stimulation is needed it will be provided, says FM Nirmala Sitharaman

In the midst of a growing perception, fueled in part by some senior government officials' opposition to another large demand-side fiscal stimulus in the current fiscal year, finance minister Nirmala Sitharaman said late Sunday that the government was open to accelerating the economic recovery through such grants if necessary. Sitharaman was quoted by Bloomberg as saying in New York on the penultimate part of her US visit, which ended early Monday, that India was in no rush to remove the pandemic-era stimulus and that it was prepared to do more if necessary to aid the country's economic recovery.

"They (fiscal stimulus measures) will be maintained, the priority on creating health infrastructure will continue," she added, adding that government capital investment and infrastructure spending will also continue.

“The challenge I will face, and the teams are also watching in the ministry, is the way the fuel prices are leading to a big crest,” Sitharaman said, adding, “this uncertainty is a big element for me.”

Of late, multiple high-frequency economic indicators, including exports, power consumption, and retail sales have corroborated the government’s claim that economic recovery was being entrenched.

Sitharaman also reiterated India’s plan to list certain categories of government securities on global bond indices, in sync with a Budget announcement in February. “It’s a question of doing quite a few things before it can happen,” she said, referring to the procedures involved. “We are in the process of doing that, I hope to do it at the earliest.”

Though the government hasn’t budgeted any amount to be raised through this route for this fiscal, any funds so mobilised would proportionately reduce the government’s gross domestic market borrowing from the budgeted `12.05 lakh crore for FY22 and have a benign effect on bond yields.

The Centre is slated to borrow `5.03 lakh crore from the market in the second half of FY22, or just about 42% of the budgeted full-year target, which has been kept unchanged at `12.05 lakh crore despite the announcement of a relief package in June.

Though the move, announced on September 27, was aimed at preventing any flare-up in bond yields at a time when international brent crude oil prices hit a three-year high, the benchmark 10-year government bond yield has since inched up by about 15 basis points. The benchmark yield, which had dropped below the 6% mark in early October 2020, started inching up since January 2021 to exceed 6% again on January 27, as supplies of papers outstripped demand. On Monday, it hit 6.35%.

Senior finance ministry officials had said that revival of economic activity itself would stir demand. Directly stimulating demand, they felt, was subject to fiscal constraints. “The problem with stimulus in a vibrant democracy is that it is easier to start a spending programme than to stop it. It may lead to a situation where the government will spend even when there is no need to spend,” one of them said.

Earlier during Sitharaman’s visit to the US, she and US treasury secretary Janet Yellen underscored the need for maintaining “supportive policies” until a strong and inclusive economic recovery is “firmly entrenched”. The joint statement comes amid concerns globally over potential taper tantrum once the US Federal Reserve begins to scale back its $120 billion-a-month quantitative easing, with many analysts expecting it to be as early as in November. In India, however, both the government and the Reserve Bank of India have hinted at an extended period of growth-supporting interventions.

The finance minister also told Bloomberg her government was pushing to get the initial public offering of state-backed Life Insurance Corporation of India across the line by next March and any delay won’t be due to a lack of political will. “The problem is not that we don’t want it or we are pussyfooting on it now, it is more a question of doing the due process.” The internal valuation that’s needed “almost annually” for a company of LIC’s size, “hasn’t been done,” Sitharaman said. Given that the 65-year old insurer hasn’t ever been valued, the process will take time, she said.

As such, robust tax collection and expenditure curbs in the first half have reduced the need for more market borrowing to fund extra spending commitments. Curbs on revenue expenditure and robust revenues helped the Union government contain its fiscal deficit in April-August to 31.1% of the budget estimate (BE) for 2021-22. This was the lowest level of fiscal deficit in any comparable period in relation to the respective BE since FY11.

Finance secretary TV Somanathan recently said the Centres’ expenditure commitments had exceeded the budgeted level by about `2 lakh crore, owing to the announcement of a raft of steps, including free grains to the poor, elevated fertiliser subsidy and clearance of dues to exporters. However, some analysts peg the extra revenue mop-up at `2 lakh crore in FY22. This means the Centre’s additional spending commitments can be easily absorbed by the extra revenue flow, without endangering in any way its FY22 fiscal deficit target of 6.8% of GDP. If anything, its curbs on “wasteful expenditure” across dozens of departments in the first half of this fiscal could generate savings of about `1.15 lakh crore, according to an FE estimate. As such, robust tax collection and expenditure rationalisation in the first half have reduced the need for more market borrowing to fund extra expenditure commitments.

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