Nirmala Sitharaman, India’s finance minister, leaves the ministry to present the budget at the parliament in New Delhi, India, on July 23, 2024.
Bloomberg | Bloomberg | Getty Images
As the Indian government walks a tight rope between fiscal prudence and reviving growth, experts suggest it will likely favor cutting deficit in its annual budget over spending aimed at turbocharging Asia’s third-largest economy.
For the fiscal year ending March 2026, the Indian government could lower the fiscal deficit target by 50 basis points to 4.4% of the country’s gross domestic product from the 4.9% target for the current fiscal year, economists at investment bank UBS said.
They also projected the government would set a nominal GDP growth target of 10.5% for the next fiscal year.
Indian Finance Minister Nirmala Sitharaman will present the national budget on Feb. 1, in what would be the coalition government’s first full-year budget after assuming power in June.
The budget comes against the backdrop of a growth slowdown in the world’s fifth-largest economy, weak domestic demand, a depreciating rupee and rising global uncertainties.
The slowdown in the economy has largely been attributed to factors such as unseasonal rainfall, fiscal tightening and tepid credit growth in the private sector as the central bank took steps to curb unsecured lending growth.
The upcoming budget is likely to re-emphasize on jobs growth in the labor-intensive manufacturing sector, while promoting rural housing programs and additional steps to control prices volatility, Goldman Sachs said.
Against the backdrop of slower domestic consumption and activity, the budget might focus on “fine-tuning existing measures and medium-term demand boost,” said Radhika Rao, senior economist at DBS.
“Tax relief [also] tops this list … even though a reduction in the personal income tax rates or standard exemption will impact a small part of the population, some support is likely in the pipeline,” Rao added.
To give consumption a boost, the central government is expected to lower personal income tax for middle-income households, she said, while continuing to prioritize spending on infrastructures, upgrading the country’s roads, railways, airports and highways.
Deficit focus
After surging to 9.2% of GDP during the pandemic, the Indian government has been steadily lowering its budget deficit in recent years, a key requirement for the country to win a credit rating upgrade.
S&P Global Rating raised in May India’s sovereign rating outlook to “positive” from “stable” while retaining the country’s credit rating at “BBB-” — its lowest investment grade level — citing the country’s robust economic expansion, political commitment to fiscal consolidation.
The finance minister pledged in her July budget speech to narrow the deficit to 4.9% in the current fiscal year, and 4.5% next fiscal year. “From 2026-27 onwards, our endeavor will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP,” she said.
The government is expected to achieve a deficit of less than 5% in the current fiscal year, in part thanks to a $25 billion record dividend from the central bank. Nomura economists attributed it partly to “a sharp underspend” in capital expenditure.
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Over the last seven years, the Indian government has consistently fallen short of fully utilizing the budgeted and additional expenditures approved through supplementary grants, using on average around 80% of the total available funds each year, according to a Goldman Sachs calculation. The shortfall has narrowed post-pandemic, when the government overshot its budgeted subsidies expenditure to cover rising food prices, it said.
The investment bank projected the government’s public expenditure to shrink further in the coming years, slowing to 3.2% of the GDP in fiscal year 2025-26.
That fiscal discipline would “remain a drag on growth in the next fiscal year,” it said, suggesting that “the fastest growth pace in public capex is behind us … overall, there is not much room to boost welfare spending.”
Economic slowdown
The world’s fastest growing major economy has seen a growth downturn. India has been steadily cutting its full year real GDP forecasts after economic growth missed expectations in the quarter ending September, when its grew by 5.4% — its slowest expansion in nearly two years.
The government has trimmed its economic growth outlook for the current fiscal year to the slowest level in four years, after three rounds of cuts brought estimates to 6.4% earlier this month from 7.2% in October.
For the next fiscal year, Nomura analysts said the government might set a nominal GDP growth target of 10.3%, up from 9.7% for the current fiscal year ending March 2025.
Still, hopes that Sitharaman will deliver a large fiscal package to pull the economy out of its recent soft patch in the upcoming budget are likely to be disappointed, Shilan Shah, deputy chief emerging markets economist at Capital Economics said in a note.
While some additional “accommodative tax and spending measures are on the cards,” they are likely to be “piecemeal,” Shah added.
Monetary easing
The Reserve Bank of India has held the interest rate steady since February in 2023, however, a sharper-than-anticipated slowdown in India’s economic growth has made the central bank’s task tougher.
With the rupee hitting record lows against the greenback, any cuts to the bank’s policy rate could spark a further rise in domestic inflation, putting further pressure on the currency and likely triggering capital outflows.
India’s consumer price inflation has fallen within the central bank’s tolerance ceiling of 6%, coming in at 5.22% in December and 5.48% in November — it had breached the upper limit in October — offering the RBI some room to lower rates.
The RBI faces a “tough choice,” said Tanvee Gupta Jain, chief India economist at UBS, adding that she expected a “shallow monetary easing cycle” of about 75 basis points, starting the February policy meeting.
The central bank, however, said last month that monetary conditions could remain tight for some time while it looked at further curbing inflationary pressures.
India-watchers have also been on tenterhooks over possible actions by President Donald Trump, who had floated the idea of universal tariffs during his campaign trail.
With a trade surplus of nearly $42 billion with the U.S., India faces heightened scrutiny under Trump’s policy focus on reducing trade deficits.
The U.S. trade policy framework under Trump’s second presidency could strengthen the dollar and Treasury yields, keeping the U.S. interest rates elevated for longer. That has complicated the policy decisions for central banks in Asia, including the RBI, as boosting growth by loosening policy would mean widening the rate differentials.
Disinvestment goal
One part of the budget that investors will be focused on is the government’s divestment of stakes in state-run entities.
India is looking to cut its disinvestment and asset monetization goals by 40% — or to less than 300 billion rupees ($3.47 billion) from 500 billion rupees — for the current financial year, domestic media outlet The Economic Times reported earlier this month.
Divestment receipts have “lagged this year” and stood at 90 billion rupees compared to the government budget estimate of 500 billion rupees, said UBS’ Jain.
She expects the government to lower the target “towards 300 billion” rupees for the next fiscal year.
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