Budget expectations: Prime Minister Narendra Modi is likely to use India’s last budget before the elections to woo voters with new spending measures, avoiding an increase in the fiscal deficit.
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The rapid expansion of the economy led to a tax benefit for the government, helping it meet its goals of curbing the deficit. That means Finance Minister Nirmala Sitharaman, who will deliver her sixth budget speech on February 1, has scope to continue infrastructure spending and take targeted steps to support Modi’s priority sectors for the elections: farmers, women, the poor and the young.
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But don’t expect a spending spree either, economists say. This week’s budget is provisional until a new administration takes office, and the finance minister has already hinted that there will be no major announcements.
“It is likely to be watched for the pace of fiscal consolidation and policy priorities going forward,” said Madhavi Arora, economist at Emkay Global Financial Services Ltd.
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Modi is also in a strong position to extend his decade in power in upcoming elections, so there is less pressure to take populist steps, Abhishek Gupta of Bloomberg Economics said in a report. The fiscal plan is expected to signal political continuity, he said.
Here’s what to look out for in the budget speech, which is usually delivered around 11 in the morning in New Delhi.
Deficit and Loan
After rising to 9.2% of the gross domestic product during the pandemic, the government has continuously lowered the fiscal deficit to keep debt under control. The deficit target of 5.9% for the current fiscal year ending in March is likely to be met, and will drop further to 5.3% in the next financial year, according to economists polled by Bloomberg.
Much of the improvement in the budget deficit this year stems from rising tax receipts. Income tax is almost 30% higher than collected in the last fiscal year, corporate tax is up 20% and GST is 10% higher, according to HSBC Holdings Plc.
The government has pledged to bring the budget deficit down to 4.5% over time, but it is also channeling more of its spending into things like infrastructure and curbing subsidies, which bodes well for the economy’s growth outlook, HSBC economists wrote in a note.
Borrowing is likely to remain near a record of around 15 trillion rupees ($180.5 billion) in the coming fiscal year, according to the Bloomberg survey, although that is unlikely to be a concern for the bond market as foreign demand will increase this year as India. is included in global bond indices.
Infrastructure Spending
The government has increased capital spending by nearly a third each year in the past three years, prioritizing spending on roads, ports and power plants. This helped support economic growth of more than 7%, according to official forecasts, making India the fastest growing major economy.
Radhika Rao, an economist at DBS Group Holdings Ltd., expects the pace of infrastructure spending to slow, although it still remains fairly elevated at 9-10%.
Rural Welfare
Economists expect the government to give farmers more financial support after some aggressive steps it took last year to curb rising food prices – such as a ban on rice, wheat and sugar exports – reduced farmers’ incomes. Poor rainfall also affected crops, hurting prospects in rural areas, where about 65% of India’s 1.4 billion people live.
The Modi government has already increased subsidies on cooking gas and fertilizers, and extended a free food program for 800 million people over five years, at a cost of $142 billion.
Jefferies India Ltd. analysts expect welfare spending to rise, with some popular programs such as the farmer’s income transfer, housing for all and health insurance expanded. Social spending excluding subsidies may increase by up to 8% in the next fiscal year, which begins in April, compared with a 4% increase this year, the analysts wrote in a note.
Local media reports suggest that the government may create a social security fund for workers in the informal sector, including jobs.
Women Voters
To help lure more women voters, the Modi government boosted cooking gas subsidies and gave cheaper loans to them. Analysts expect the budget to outline more support measures aimed at women, given the prominent role they will play in the upcoming elections.
The plan to give free gas bottles to women “may see higher spending amid the government’s vision to extend the program to 7.5 million new beneficiaries over the next three years,” QuantEco Research economists led by Shubhada Rao wrote in a note.
Sitharaman may also seek to double the annual payment to female farmers who own land to 12,000 rupees, according to media reports.