© Reuters. FILE PHOTO: Indian Finance Minister Nirmala Sitharaman speaks during a side event on the G20 Finance Ministers and Central Bank Governors Meeting in Nusa Dua, Bali, Indonesia, 14 July 2022. Made Nagi/Pool via REUTERS/File Photo
By Aftab Ahmed
NEW DELHI (Reuters) – The Indian government will present a budget on Feb. 1 that will likely put deficit reduction ahead of vote-winning spending, even as Prime Minister Narendra Modi looks towards seeking a rare third term of office in 2024.
Officials and economists said the large size of recent deficits and a need to gain investor confidence was forcing fiscal caution on the government, overriding the contrary priority of spending to support a weakening economy.
In pulling back the deficit, Finance Minister Nirmala Sitharaman’s budget for the financial year beginning April 1 will also help hold inflation below the top of the central bank’s target range, 6%. (Graphic: Growth on the cards, https://www.reuters.com/graphics/INDIA-ECONOMY/GDP/gkplwxmxwvb/chart_eikon.jpg)
As India faces weakening demand for its exports from the slowing economies of trading partners, its own growth is still recovering from the damage of pandemic controls.
During the pandemic, India had to spend billions of dollars to provide food to the poor, cheap loans for small businesses and free vaccines, pushing the fiscal deficit to a record 9.3% of gross domestic product (GDP) in 2020/21.
Debt issuance soared, and some of those bonds are maturing and must be refinanced, further limiting the government’s room for manoeuvre.
“The upcoming budget faces acute policy trade-offs between nurturing a nascent growth recovery and diminishing fiscal space with challenging debt dynamics,” Madhavi Arora, economist at Emkay Global Financial Services, said.
The federal government is likely to cut its fiscal deficit to between 5.8% and 5.9% of GDP in 2023/24 from the 6.4% of 2022/23, other officials have said. The deficit will remain much larger than the 4% to 4.5% of GDP that was usual for decades.
The government now hoped to return to those historical levels by 2025/26, said two officials who were familiar with budget planning but asked not to be named. (Graphic: India’s fiscal deficit, https://www.reuters.com/graphics/INDIA-ECONOMY/FISCALDEFICIT/znvnbzzzkvl/chart_eikon.jpg)
The international slowdown will hold down growth in nominal GDP – real growth plus inflation – to about 11% for 2023/24 from an estimated 15.4% for 2022/23. That will…