The Indian government remains committed to its pre-election fiscal targets, despite the Bharatiya Janata Party (BJP) losing its parliamentary majority in this year’s national vote, according to a Reuters poll conducted from July 5 to July 16. The poll found that the July 23 budget will likely stick to the borrowing and spending goals outlined in the interim budget presented in February, as Prime Minister Narendra Modi’s government continues to emphasize economic growth through infrastructure investment.
Despite the political setback, the BJP has managed to retain most of its ministers from its second term, signaling a desire for continuity in fiscal policy. This includes prioritizing infrastructure spending as a means to stimulate economic growth. However, weak private sector expenditure and a chronic unemployment issue remain major concerns, with unemployment emerging as a critical factor in the electoral backlash against Modi’s administration.
No Significant Changes in Spending Plans
Of the 45 economists surveyed, 27 believed the government would not deviate significantly from its planned spending in the July budget compared to the interim budget. The remaining 18 expected some changes. Sonal Varma, chief economist for India at Nomura, expressed confidence that the government would maintain its fiscal discipline despite a weaker political mandate. “We expect the budget to signal policy continuity and an uncompromising focus on fiscal consolidation,” Varma said, adding that this budget is crucial for Modi’s third term as it will outline the government’s economic strategy for the next five years.
The median forecast from the poll indicates that the fiscal deficit target will remain at 5.10% of gross domestic product (GDP), with gross borrowing estimated at Rs 14.13 trillion ($169.10 billion), in line with the February budget projections.
Fiscal Discipline Amid Political Pressures
While Modi’s government faces pressure from coalition partners who are seeking additional funds for their home states, most economists believe that the fiscal consolidation path will not be derailed. A significant factor in this confidence is the record dividend transfer of Rs 2.11 trillion from the Reserve Bank of India (RBI), which has provided a substantial financial windfall to the government.
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“Although there is quite some pressure on Modi from his coalition partners, we don’t think these are likely to derail the previously announced fiscal consolidation plans. This is because of the greater headroom provided by the RBI dividend payouts,” said Alexandra Hermann, an economist at Oxford Economics. Hermann also noted the importance of maintaining fiscal discipline, given the prospect of a rating upgrade by S&P Global Ratings, which recently revised India’s outlook from stable to positive. India’s sovereign credit rating remains just one notch above junk, with federal and state government debt levels at around 80% of GDP—higher than most similarly-rated emerging economies.
Capital Expenditure and Infrastructure Focus
The government is also expected to stick to its record capital expenditure target of Rs 11.11 trillion, or 3.40% of GDP, dedicated to infrastructure development. This focus on capital expenditure is seen as crucial for driving long-term economic growth, even as the government balances political and economic demands.
Shreya Sodhani, regional economist at Barclays Bank, said, “While maintaining focus on capex, we think the government will use increased receipts to fund higher revenue spending, balancing economic and political needs.” Sodhani emphasized that the government’s budget decisions will likely reflect a balancing act between economic priorities and the financial demands of coalition partners.
Conclusion
Despite political challenges following the BJP’s loss of its majority, the Indian government is expected to maintain its fiscal and capital expenditure targets in the upcoming budget. The combination of a significant dividend from the RBI and the need to ensure fiscal stability for a potential rating upgrade will likely drive budgetary decisions. With infrastructure development at the core of the government’s growth strategy, the July 23 budget will be a key indicator of Modi’s administration’s approach to navigating economic challenges and political pressures during its third term.
