In order to win over voters with fresh spending proposals and prevent a rise in the fiscal deficit, Prime Minister Narendra Modi is probably going to use India's final budget before the elections.
The government has received a tax windfall as a result of the economy's explosive growth, which has assisted it in reducing the deficit. Accordingly, Finance Minister Nirmala Sitharaman, who will present her sixth budget on February 1, has the authority to maintain the current level of infrastructure investment and implement specific measures to assist Modi's election-related priority sectors, which include women, farmers, the impoverished, and youth.
However, experts advise against anticipating a spending binge as well. The finance minister has already signalled that there won't be any significant announcements, and this week's budget is an interim one until a new administration takes office. The rate of fiscal consolidation and future policy priorities will probably be closely monitored, according to Emkay Global Financial Services Ltd. economist Madhavi Arora.
There is less temptation to implement populist measures because Modi is well-positioned to continue his ten-year term in office in the next elections, according to a research by Bloomberg Economics' Abhishek Gupta. According to him, the fiscal plan should indicate the continuation of policy. Here are some things to look out for when the budget speech is given in New Delhi, often at around 11 a.m.
The Debt and the Borrowing
The government has been gradually reducing the budget deficit to keep debt under control after it spiked to 9.2% of GDP during the pandemic. According to experts surveyed by Bloomberg, the 5.9% deficit target for the current fiscal year, which ends in March, is likely to be exceeded. It will then likely be trimmed to 5.3% in the following financial year.
Rising tax revenues have contributed significantly to this year's improvement in the budget deficit. HSBC Holdings Plc reports that income tax collections are about 30% more than they were in the previous fiscal year, corporate tax is up 20%, and GST is up 10%. The government has promised to reduce the deficit to 4.5% of GDP over time, but in the meanwhile, it is spending more on infrastructure and cutting back on subsidies, which is encouraging for the growth prospects of the economy, according to a note from HSBC's economists.
According to the Bloomberg survey, borrowing will probably stay close to a record of about 15 trillion rupees ($180.5 billion) in the upcoming fiscal year. However, since foreign demand is expected to soar this year as a result of India's inclusion in global bond indexes, the bond market is not likely to be concerned about this.
Spending on Infrastructure
In the last three years, the government has increased capital expenditures by over a third yearly, giving highways, ports, and power plants first priority. Based on government predictions, this has contributed to almost 7% economic growth, making India the fastest-growing major economy.
After the government's harsh measures to control skyrocketing food prices last year, such as prohibiting the export of rice, wheat, and sugar, cut farmers' incomes, economists anticipate the government will provide farmers with more financial help. Around 65% of India's 1.4 billion population live in rural areas, where poor rainfall has a negative impact on crops and prospects.
At a cost of $142 billion, Modi's government has already extended a five-year, 800 million-person free food programme and raised subsidies on fertilizer and cooking gas. Analysts at Jefferies India Ltd. predict an increase in social spending, with plans to extend popular programmes like health insurance, housing for all, and the farmer income transfer. The analysts noted in a note that social spending, excluding subsidies, would rise by as much as 8% in the upcoming fiscal year that starts in April as opposed to a 4% increase this year. According to local media sources, the government might establish a social security fund for people doing gig work and other informal jobs.
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