Indian Finance Minister faces a difficult decision: increase growth or reduce deficit

As the Indian government walks a tight rope between fiscal prudence and growth reviving, experts suggest that it will probably favor the reduction of the deficit in its annual budget on spending aimed at the turbocharger of the third largest economy in Asia.

For the fiscal year that ends in March 2026, the Indian government could reduce the objective of the fiscal deficit by 50 basic points to 4.4% of the gross domestic product of the country of the 4.9% target for the current fiscal year, said bank economists of UBS investment.

They also project that the Government would establish a 10.5% GDP nominal growth target for next fiscal year.

The Indian Finance Minister, Nirmala Sitharaman, will present the national budget on February 1, in what would be the first budget of the entire year of the coalition government after assuming Power in June.

The budget comes in the context of a growth slowdown in the fifth largest economy in the world, weak domestic demand, a depreciation rupe and the growing global uncertainties.

The deceleration in the economy has greatly attributed to factors such as non -seasonal rain, fiscal hardening and warm credit growth in the private sector when the Central Bank took measures to curb the growth of non -guaranteed loans.

It is likely that the next budget will emphasize the growth of employment in the manufacturing sector that has a lot of labor, while promoting rural housing programs and additional steps to control price volatility, said Goldman Sachs.

As domestic consumption and economic activity decrease, the budget could focus on “adjusting existing measures and the impulse of medium -term demand,” said Radchika Rao, a senior economist of DBS.

“Fiscal relief (also) heads this list … Although a reduction in personal income tax rates or standard exemption will affect a small part of the population, it is likely to be support in the pipeline “Rao added.

To boost consumption, the central government is expected to decrease the personal income tax for average income homes, he said, while continuing to prioritize infrastructure spending, improving roads, railways, airports and roads in the country.

After rising to 9.2% of GDP during pandemicThe Indian government has been constantly reducing its budget deficit in recent years, a key requirement for the country to win a credit rating update.

Global S&P qualification raised in May of the sovereign qualification perspective of India A “positive” of “stable” while retaining the country’s credit rating in “BBB-“– Your lowest investment grade level – Citing the solid economic expansion and political commitment of the country to fiscal consolidation.

The Minister of Finance promised His July budget speech to reduce the deficit to 4.9% in the current fiscal year, and 4.5% next fiscal year. “From 2026-27, our effort will be to maintain the fiscal deficit every year so that the central government debt is in a decline as a percentage of GDP,” he said.

The government is expected to reach a deficit of less than 5% in the current fiscal year, in part Thanks to a record dividend of $ 25 billion of the Central Bank. Nomura economists were partly attributed to “an acute subsidy” in capital spending.

In the last seven years, the Indian government has constantly decreased to completely use budgeted and additional expenses approved through supplementary subsidies, using an average of around 80% of the total funds available each year, according to a calculation of Goldman Sachs. The deficit has been reduced after the pandemic, when the government exceeded its budget subsidies expenses to cover the increase in food prices, he said.

The Investment Bank projected that public government expenditure was further reduced in the coming years, decreasing 3.2% of GDP in fiscal year 2025-26.

That fiscal discipline “would continue to be a drag in growth in the next fiscal year,” he said, suggesting that “the fastest growth rate in the public capex is behind us … in general, there is not much space for Increase well -being expense. “

The world important faster economy He has seen a recession of growth. India has been constantly reducing its real GDP forecasts after economic growth Lost expectations In the quarter that ended in September, when 5.4%grew, its slower expansion in almost two years.

The government has trimmed its perspective of economic growth for the current fiscal year at the slowest level in four years, after three rounds of cuts brought estimates to 6.4% before This month 7.2% In October.

For the next fiscal year, Nomura analysts said the government could establish a 10.3% GDP nominal growth target, compared to 9.7% for the current fiscal year that ends in March 2025.

Even so, the hopes that Sitharaman deliver a large fiscal package to get the economy from its recent soft patch in the next budget is likely to be disappointed, said Shilan Shah, the economist of emerging markets attached to Capital Economics in a note.

While some additional measures of “taxes and accommodated expenses are on the cards”, they are likely to be “fragmentary,” Shah added.

Indian consumer price inflation has fallen into the central bank tolerance roof of 6%, enter to 5.22% in December and 5.48% in November – had violated the upper limit in October – Offering RBI some space for lower rates.

The RBI faces a “difficult option,” said Tanvee Gupta Jain, chief economist of India in UBS, added that he expected a “surface monetary flexibility cycle” of approximately 75 basic points, starting the February policy meeting.

However, the Central Bank said last month that monetary conditions could remain narrow for some time while analyzing more to stop inflationary pressures.

India observers have also been in Terhooks on possible actions by President Donald Trump, who had presented the idea of ​​universal tariffs during his campaign.

With a trade surplus of almost $ 42 billion with the United States., India faces greater scrutiny under Trump’s political approach to reducing commercial deficits.

The United States commercial policy framework under the second presidency of Trump could strengthen the returns of the dollar and treasure, maintaining interest rates of the United States for longer. What you have complicated policy decisions for central banks in Asia, Including RBI, since the increase in growth when loosening politics would mean expanding rates differentials.

India is looking doUT your disinversion and monetization objectives of assets In 40%, or up to less than 300 billion rupees ($ 3.47 billion) of 500 billion rupees, for the current financial year, he reported earlier this month.

Disinvestment receipts have “delayed this year” and remained at 90 billion rupees compared to the estimation of the government budget of 500 billion rupees, Jain of UBS said.

She expects the government to decrease the “tornery of 300 billion” of rupees for the next fiscal year.