Asia Economy

India's finance minister says growth target of 6% to 6.5% in 2021 is 'realistic'

Key Points
  • India's finance minister Nirmala Sitharaman said the government's growth targets for 2021, outlined in the country's annual economic survey, are "realistic." 
  • Asia's third-largest economy is projected to grow in the range of 6% to 6.5% in the new fiscal year.
India's finance minister says 2021 growth target of 6% to 6.5% is 'realistic'
India's finance minister says 2021 growth target of 6% to 6.5% is 'realistic'

India's finance minister said there are signs pointing to a turnaround in Asia's third-largest economy, and the government's growth targets for 2021 are within reach.

"I say it is realistic because we've taken various factors on board, and expect the (government's) revenue generation to improve, which it's already showing signs of," Nirmala Sitharaman told CNBC's Tanvir Gill on Sunday.

She was referring to the annual economic survey, released on Friday, that projected the economy will grow in the range of 6% to 6.5% in the new fiscal year that begins on Apr. 1. For those numbers to be realized, the economic output needs to see a sharp rebound after the pace of expansion slowed to a six-year low in the three months that ended in September.

Sitharaman explained that an improvement in the government's revenue generation would enable it to invest more into infrastructure projects that could see some immediate gains as it "puts money in the hands of the people (and) core industries revive because of the demand."

On Saturday, India announced its annual budget for the new fiscal year, where Sitharaman committed 2.83 trillion rupees (almost $40 billion) for agriculture and rural development and lowered personal income tax brackets. Some economists said the budget "failed to live up to expectations."

"The budget was big on messages and did a good job of laying out the government's vision of the Indian economy," Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, wrote in a note. "But it delivered little in terms of an action plan to support sagging domestic demand."

Citi analysts added that the broad message was that "the growth revival will have to be driven by the private sector, while government would aim to provide an enabling environment."

Realistic growth target

Late last year, Sitharaman introduced an ambitious plan that would see India invest about 103 trillion rupees ($1.4 trillion) in thousands of infrastructure projects over the next five years. They include projects in health care, transportation and logistics. Financial contributions are said to be borne by the central government, state governments and the private sector.

Nirmala Sitharaman, India's finance minister, reacts during a news conference in New Delhi, India, on Saturday, Feb. 1, 2020.
T. Narayan | Bloomberg | Getty Images

Anecdotally, there have been signs of a revival in demand for the auto and housing sectors, according to Sitharaman. Still, car sales fell 19% last year while sales of two-wheelers, an indicator of rural economic health, declined 14%, Reuters reported.

Some of the economic indicators have pointed to signs of a turnaround in the sluggish growth seen in recent quarters. India's industrial output, one of the measures of economic activity in the country, rose 1.8% compared to a year ago in November, where manufacturing activities increased by 2.7%, according to government data.

Fiscal deficit target

In the new budget, Sitharaman said the government would not meet its fiscal deficit target of 3.3% in the current fiscal year — instead, it expects that number to be 3.8%. A fiscal deficit occurs when a government's total spending is more than the revenue it earns.

For the fiscal year starting Apr. 1, the target has been set at 3.5%. The finance minister told CNBC she is not expecting any deviation from planned expenditures and revenues.

Sitharaman added that the government's revenue generation will likely improve due to the closing of loopholes in the indirect goods and services tax scheme. Disinvestment plans for struggling state-owned assets are also expected to go through, she said. That includes the government's ongoing attempts to sell its stake in the country's flagship airline carrier, Air India.

"Therefore, disinvestment revenue together with improved revenue generation from taxable sources gives me reason to think that (the fiscal deficit) coming down from 3.8% ... is achievable," she said.

Message for rating agencies

Ratings agency Moody's said the new budget highlights "challenges to fiscal consolidation from slower real and nominal growth." It also said the government's 3.5% fiscal deficit target will be difficult to achieve.

When asked what message she had for ratings agencies and their concerns over India's aggressive targets, Sitharaman said her ministry had shown "great prudence" in managing the fiscal side of the economy. As finance minister, she said she is "very clearly showing signs of spreading" the country's borrowing, as seen in the country's first "ETF (exchange traded fund) bond successes."

India finance minister defends 2021 fiscal deficit target of 3.5% amid sluggish growth
India finance minister defends 2021 fiscal deficit target of 3.5% amid sluggish growth

In December, Sitharaman announced India's first debt-based ETF made up of debt from state-run companies, which allows retail investors to buy government debt. In the new budget, she proposed to expand that by floating a new debt-based ETF consisting mainly of government securities.

She said that through the latest budget, she had opened up avenues for deepening the bond markets in India. "I've also very clearly shown, through the income tax rate reduction, and removing many of the exemptions, giving the taxpayer alternatives where he can invest," she told CNBC.

"With all this, I expect that the economy will achieve a certain buoyancy and that should not be lost out by the rating agencies in assessing the Indian economy," Sitharaman added.

While the budget adjusted the personal income tax brackets, some analysts have expressed concern that in light of the macroeconomic environment, many people may choose to save their additional disposable income instead of investing it.

Why is India's growth slowing?
Why is India's growth slowing?