India’s government will present a budget on Feb. 1 that is likely to put deficit reduction above vote-winning spending, even as Prime Minister Narendra Modi aims for a rare third term in office in 2024.
Officials and economists said the large size of the recent deficits and the need to gain investor confidence forced the government into fiscal prudence and overturned the opposite priority of spending to support a weakening economy.
By reducing the deficit, Finance Minister Nirmala Sitharaman’s budget for the financial year beginning April 1 will also help keep inflation below the upper end of the central bank’s target range of 6%.
As India faces declining demand for its exports from the slowing economies of trading partners, its own growth is still recovering from the damage of pandemic controls.
During the pandemic, India had to spend billions of dollars to provide the poor with food, cheap loans for small businesses and free vaccines, pushing the budget deficit to a record 9.3% of gross domestic product (GDP) in 2020/21.
Debt issuance boomed and some of those bonds are maturing and needing to be refinanced, further limiting the government’s room for manoeuvre.
“The budget ahead faces acute policy trade-offs between nurturing a burgeoning growth recovery and shrinking fiscal space with challenging debt dynamics,” said Madhavi Arora, economist at Emkay Global Financial Services.
The government is likely to reduce its budget deficit to between 5.8% and 5.9% of GDP in 2023/24 from the 6.4% in 2022/23, other officials said. The deficit will remain much larger than the decades-usual 4% to 4.5% of GDP.
The government now hopes to return to those historic levels by 2025/2026, said two officials familiar with budget planning but asked not to be named.
The international slowdown will limit nominal GDP growth – real growth plus inflation – to around 11% for 2023/24, from an estimated 15.4% for 2022/23. This leads to lower growth in tax collection.
Just a year before the election, the government may not be able to raise more money by accelerating the sale of state-owned enterprises, a generally unpopular move.
Sitharaman will therefore have little scope to provide significant tax breaks for the wage-earning class and will have to significantly cut subsidies that help the poor.
“The fiscal consolidation path promised by the government will require massive efforts in the coming years,” said HSBC economist Pranjul Bhandari, adding that cutting budget deficits would be necessary to control inflation.
The government has already halted the pandemic-era free food program and is expected to cut food and fertilizer subsidies by nearly $17 billion.
As current spending falls, capital spending is likely to grow, but at its slowest pace in three years, the two officials said.
NUMBERS VERSUS SPEECH
The Modi government has historically used the budget document to set a broad economic vision and social agenda. One, in 2014, was called “Sabka Saath Sabka Vikas”, roughly translated as “inclusive growth”; another in 2020, “Aatmanirbhar”, meaning “self-reliance”, aimed to reduce dependence on imports.
India has fallen short of many of those targets and is struggling to create enough jobs. Economic growth is no longer as fast as before 2014.
Yet Sitharaman is again expected to express a long-term vision, this time for spending tens of billions of dollars on infrastructure, green projects, healthcare and education.
Health, education and defense funds are unlikely to grow more than 10% to 12% this year, the two officials said.
According to a Reuters poll, the government is expected to borrow a record 16 trillion rupees in 2023/24.
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