In a bold move aimed at enhancing economic stability and fostering infrastructure development, the Indian government is reportedly planning to reduce its budget deficit by at least 50 basis points in the fiscal year 2024/25. Simultaneously, officials are looking to increase capital spending by as much as 20%, signaling a commitment to fueling economic growth.
The ambitious plan was disclosed by two government officials who emphasized the need for increased revenues and efforts to curb subsidies to achieve the dual goal of shrinking the fiscal deficit while expanding capital expenditure. Devendra Pant, an economist at India Ratings, remarked on the significance of these moves, stating, “Shrinking the fiscal deficit and yet at the same time increasing capital spending will depend on an increase in revenues and efforts to curb subsidies.”
Such a strategy, particularly efforts to cut welfare spending and subsidies, would typically be uncommon for a government approaching a national election in a few months. However, with Prime Minister Narendra Modi widely expected to secure a rare third term, the government seems determined to prioritize fiscal discipline.
Finance Minister Nirmala Sitharaman is set to unveil the budget for the fiscal year 2024/25 on February 1. The plan to lower the fiscal deficit by at least 50 basis points is currently under discussion, with various scenarios being considered for the budget year starting in April, according to one of the sources.
Both officials expressed confidence in the government’s ability to meet the 5.9% target for the current fiscal year ending on March 31. The focus on fiscal responsibility aligns with India’s broader economic strategy, seeking to attract foreign investors and maintain a favorable rating from agencies.
To propel infrastructure development, the government aims to raise capital spending from the current year’s plan of Rs 10 trillion to as much as Rs 12 trillion ($144.59 billion). Over recent years, the government’s emphasis on infrastructure spending has played a pivotal role in propelling India into one of the world’s fastest-growing economies, despite challenges such as high inflation impacting consumption.
A substantial reduction in the fiscal deficit is expected to provide relief to foreign investors and rating agencies, who have expressed concerns about India’s ability to narrow the deficit to below 4.5% of GDP in the next two years. The government is also mindful of this target, especially as new investors assess the country’s debt levels following their inclusion in the JPMorgan and Bloomberg emerging market indexes.
As of now, India’s finance ministry has not issued an immediate response to inquiries seeking further clarification on the proposed fiscal measures. The upcoming budget announcement on February 1 will be closely watched by economists, investors, and the public as the government outlines its economic roadmap for the next fiscal year.