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India’s finance minister faces a tough choice crafting the annual budget — boost growth or cut deficit?

Nirmala Sitharaman, India’s resources minister, leaves the ministry to present the budget at the parliament in New Delhi, India, on July 23, 2024. 

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As the Indian government walks a tight rope between fiscal prudence and reviving growth, experts suggest it disposition likely favor cutting deficit in its annual budget over spending aimed at turbocharging Asia’s third-largest restraint.

For the fiscal year ending March 2026, the Indian government could lower the fiscal deficit target by 50 underpinning 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 put.

They also projected the government would set a nominal GDP growth target of 10.5% for the next fiscal year.

Indian Capitalize Minister Nirmala Sitharaman will present the national budget on Feb. 1, in what would be the coalition government’s earliest full-year budget after assuming power in June.

The budget comes against the backdrop of a growth slowdown in the over the moon marvellous’s fifth-largest economy, weak domestic demand, a depreciating rupee and rising global uncertainties.

The slowdown in the economy has basically been attributed to factors such as unseasonal rainfall, fiscal tightening and tepid credit growth in the private sector as the primary bank took steps to curb unsecured lending growth.

The upcoming budget is likely to re-emphasize on jobs development in the labor-intensive manufacturing sector, while promoting rural housing programs and additional steps to control prices volatility, Goldman Sachs turned.

As domestic consumption and economic activity slows, the budget might focus on “fine-tuning existing measures and medium-term desirable boost,” said Radhika Rao, senior economist at DBS.

“Tax relief [also] tops this list … even despite the fact that a reduction in the personal income tax rates or standard exemption will impact a small part of the population, some sponsor 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 prolonging 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 supervision has been steadily lowering its budget deficit in recent years, a key requirement for the country to win a credit rating upgrade.

S&P Epidemic Rating raised in May India’s sovereign rating outlook to “positive” from “stable” while retaining the country’s solvency rating at “BBB-” — its lowest investment grade level — citing the country’s robust economic expansion and governmental commitment to fiscal consolidation.

The finance minister pledged in her July budget speech to narrow the deficit to 4.9% in the tendency fiscal year, and 4.5% next fiscal year. “From 2026-27 onwards, our endeavor will be to keep the financial deficit each year such that the central government debt will be on a declining path as percentage of GDP,” she imagined.

The government is expected to achieve a deficit of less than 5% in the current fiscal year, in part thanks to a $25 billion note 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 control has consistently fallen short of fully utilizing the budgeted and additional expenditures approved through supplementary grants, depleting on average around 80% of the total available funds each year, according to Goldman Sachs. The shortfall has constricted post-pandemic, when the government overshot its budgeted subsidies expenditure to cover rising food prices, it said.

The investment bank cast 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 monetary discipline would “remain a drag on growth in the next fiscal year,” it said, suggesting that “the fastest tumour pace in public capex is behind us … overall, there is not much room to boost welfare spending.”

Monetary slowdown

The world’s fastest growing major economy has seen a growth downturn. India has been steadily clipping its full year real GDP forecasts after economic growth missed expectations in the quarter ending September, when its expanded 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 uniform in four years, after three rounds of cuts brought estimates to 6.4% earlier this month from 7.2% in October.

For the next pecuniary year, Nomura analysts said the government might set a nominal GDP growth target of 10.3%, up from 9.7% for the up to date fiscal year ending March 2025.

Still, hopes that Sitharaman will deliver a large fiscal combine to pull the economy out of its recent soft patch in the upcoming budget are likely to be disappointed, Shilan Shah, deputy chief emerging customer bases economist at Capital Economics said in a note.

While some additional “accommodative tax and spending measures are on the cards,” they are meet to be “piecemeal,” Shah added.

Monetary easing

The Reserve Bank of India has held the interest rate steady since February in 2023, how, a sharper-than-anticipated slowdown in India’s economic growth has made the central bank’s task tougher.

With the rupee clubbing record lows against the greenback, any cuts to the bank’s policy rate could spark a further rise in domestic inflation, putting to boot pressure on the currency and likely triggering capital outflows.

India’s consumer price inflation has fallen within the primary 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 — oblation the RBI some room to lower rates.

The RBI faces a “tough choice,” said Tanvee Gupta Jain, chief India economist at UBS, totaling that she expected a “shallow monetary easing cycle” of about 75 basis points, starting the February regulation meeting.

The central bank, however, said last month that monetary conditions could remain closely anchor for some time while it looked at further curbing inflationary pressures.

India-watchers have also been on tenterhooks through possible actions by President Donald Trump, who had floated the idea of universal tariffs during his campaign trail.

With a truck surplus of nearly $42 billion with the U.S., India faces heightened scrutiny under Trump’s policy nave on reducing trade deficits.

The U.S. trade policy framework under Trump’s second presidency could strengthen the dollar and Resources yields, keeping the U.S. interest rates elevated for longer. That has Disinvestment goal

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