(Bloomberg) – India will announce its budget on Wednesday, testing Prime Minister Narendra Modi’s fiscal audacity, seen as key to boosting investor sentiment, even as there is likely to be less room left for handouts a year before he takes a third deadline.
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Modi, enjoying a continued surge in popularity as his second term draws to a close, appears poised to continue fiscal consolidation as he steps onto the global stage with India’s presidency of the Group of 20 countries. Reducing the deficit, which reached a record 9.2% of gross domestic product during the first year of the pandemic, is necessary for Asia’s third-largest economy to improve its credit rating, which currently has the lowest investment grade. , to improve.
India recently restructured the world’s largest food program and cut energy subsidies to enable about 1 trillion rupees ($12.3 billion) in government savings. A Bloomberg poll this month of more than 20 economists found that the majority expect the budget to eschew populist measures from the fiscal year beginning in April and focus on bolstering manufacturing and job creation.
Eschewing wasteful spending is critical to India’s robust long-term growth as it frees up cash to build more roads and ports, improve logistical links that will support Modi’s ambition to make India the new global powerhouse, without inflating the deficit to 6.4% of GDP in the year ending March.
Fiscal consolidation is in line with Modi’s first budget in 2014. He is expected to further polish those credentials as he becomes the first to lead what is now arguably the world’s most populous nation.
A review of budgets since Modi came to power shows that he has been squeezing subsidies beyond the pandemic years when aid increased.
The government is pressing ahead with putting its fiscal house in order, even as it threatens to upset Modi’s loyal base of female voters, for example. Provisions for subsidizing liquefied petroleum gas used for cooking for the current fiscal year were cut from 352 billion rupees two years ago to 58.1 billion rupees.
“Fuel costs are hurting us the most right now,” said Nupur Kaushik, a 37-year-old New Delhi resident who also pushes for lower taxes and incentives for working women.
Pranjul Bhandari, chief economist of HSBC Holding Plc, said the path to fiscal consolidation of the country will require a huge effort. “Think of it like a long-distance cyclist who has to keep pedaling hard to reach the finish line.”
India’s prime minister has one year before the summer 2024 elections to steer politically correct course if fiscal prudence looks set to hurt his party’s chances of winning the vote. State elections this year will show whether Modi’s popularity can withstand harsh measures. An interim budget next year also provides some leeway for the premiere.
“Fiscal pressures could arise from upcoming national elections,” says Fitch Ratings Ltd., which has a BBB rating for India. “But the dominant political position of the incumbent government likely mitigates these risks.”
Under Modi, India has grown to become the fifth largest economy in the world. Looking outwards, he should exploit the country’s full economic potential and meet the target of increasing the share of output from 14% today to 25% of GDP. That will help the nation beat Japan to become the world’s third-largest economy before the end of the decade.
A year ago, Finance Minister Nirmala Sitharaman presented a vision to guide the economy for the next 25 years. That includes boosting growth through infrastructure investment and increasing agricultural production to reduce dependence on imports, including oilseeds.
Those measures have not yet translated into gains for a Modi supporter like Trilok Chand, a resident of the village of Tibbi in Himachal Pradesh.
“Whatever we get from farming isn’t enough for my family of four,” says Chand, who grows rice and wheat on his one-acre small farm. “The prices of all items are very high,” he said, wishing the government to lower the prices of essential goods. “If they don’t do this, they will repent.”
–With help from Kevin Varley, Vrishti Beniwal, Bibhudatta Pradhan, Muneeza Naqvi, Jeanette Rodrigues and Debjit Chakraborty.
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