India's Modi to bet on popularity over populism in budget ahead of polls

Indian PM Modi aims for conservative budget, focusing on infrastructure over big welfare spending

NEW DELHI:

Indian Prime Minister Narendra Modi is expected to buck a trend of spending big on new welfare programmes in a budget before a general election to instead focus on infrastructure to keep the economy humming while narrowing the budget gap.

Finance Minister Nirmala Sitharaman will announce the budget for 2024/25 on Feb. 1, which economists say will be heavy on political messaging, drumming up the Modi government's pitch of inclusive growth, but conservative in its approach to spending.

"The government will likely aim to strike a balance between pre-election political messaging, fiscal consolidation needs and continued focus on capex," said Samiran Chakraborty, economist with Citigroup.

Read also: India’s financial failings and terrorism

For instance, the government may double the annual payout to female farmers to 12,000 rupees, to attract women voters but the policy will only cost $1.44 billion annually, a meagre amount in the government's overall spending, according to a Reuters report.

The government will also likely keep its major subsidies in check for the next fiscal year that starts from April 1 at current year's level at around $48 billion.

Modi extended his free foodgrain programme for the next five years, and that too will incur very little additional spending as it has been running a subsidised foodgrain programme for years.

It is planning to reduce its fiscal deficit, which is the difference between the expenditure and revenue collected, by at least 50 basis points in 2024/25, from the current target of 5.9% of GDP for the ongoing fiscal year.

PHOTO: REUTERS GRAPHICS

The government is expected to look past the opposition’s criticism of high unemployment among youth and continue spending heavily on infrastructure while trying to draw foreign and domestic manufacturers to invest via incentives in the hope its growth-boosting policies will eventually create jobs.

The likely lowering of the fiscal deficit in an election year shows the government may not be relying very heavily on social spending to woo voters but bank on Modi’s popularity that helped the ruling party win recent state elections and emotive events like the opening of a Hindu temple on a long disputed site.

"As it is a general election year, there will be at least some temptation from within the ruling BJP (Bharatiya Janata Party) to announce big fiscal giveaways," said Shilan Shah, deputy chief emerging markets economist at Capital Economics.

"But following the BJP's exceptionally strong performance in recent state elections, we think it will conclude that it has enough political goodwill to balance the need for giveaways with its long-term ambition of reining in the fiscal deficit," said Shah.

Growth impulse

Powered by public spending, India's economy grew 7.6% in the July-September quarter, and is forecasting growth of 7.3% for the full year that ends on March 31, the world's fastest pace for a major economy.

A further increase of as much as 20% year-on-year in capital expenditure is expected for 2024/25.

PHOTO: REUTERS GRAPHICS

"The strategy of boosting on-budget capital expenditure is likely to be continued, which will in turn help the private sector investment cycle to gain traction," said Deutsche Bank in a note.

PHOTO: REUTERS GRAPHICS

India is likely to stay away from major announcements on privatisation owing to elections, government officials said.