Budget 2024: Government Aims for Lower Deficit amid Record Infrastructure Spending; Report

The Indian government, led by Prime Minister Narendra Modi's Bharatiya Janata Party (BJP), is gearing up for the 2024-25 fiscal year. A recent Reuters poll of 41 economists reveals that despite a surge in capital expenditure to an all-time high, the government is aiming to narrow the fiscal deficit to 5.30% of GDP in the upcoming budget, with a long-term target of 4.50% by the end of the 2025-26 fiscal year.

As the nation braces for an election year where the BJP is predicted to secure a third term, experts anticipate that the budget will prioritize infrastructure investment while addressing the demands of a burgeoning workforce and the need for inclusive growth.

Capital spending has witnessed a surge of over 33% in the current fiscal year, exceeding Rs 10 lakh crore ($120 billion). Projections indicate a further 15% increase in the next fiscal year, reaching Rs 11.50 lakh crore. This spike in capital spending is expected to stimulate private investment, driving India's economic expansion.

Economists emphasize that sustained improvement in India's infrastructure is crucial for reviving the private investment cycle. Alexandra Hermann, lead economist at Oxford Economics, notes, "Continued and rapid improvement in India's infrastructure will be paramount," but she also stresses the need to enhance human capital levels for sustainable and inclusive growth. According to Hermann, education should be the primary focus to leverage India's immense potential.

Interestingly, the poll reveals a discrepancy between economists' recommendations and the expected budget priorities. While nearly all respondents (34 out of 41) cite infrastructure investment as the top priority, education and healthcare, highlighted by Hermann, are not prominently featured. Rural development (17) and job creation (16) follow closely, emphasizing the urgency of addressing employment challenges.

Kunal Kundu, India economist at Societe Generale, points out the absence of private non-infrastructure business capital expenditure, signalling potential growth challenges. He highlights stress in rural areas, particularly within the struggling informal sector and micro, small, and medium enterprises (MSMEs), which are crucial job generators.

With a keen eye on fiscal prudence, the government is not expected to expand welfare schemes further. The focus remains on narrowing the fiscal deficit, with gross borrowing projected at Rs 15.60 lakh crore, mirroring the current year's projection. The consensus among economists suggests that growth challenges persist, with concerns about modest aggregate domestic demand and visible stress in the rural areas.

Kundu emphasizes, "Stress is more visible in the rural areas as the informal sector continues to struggle, especially MSMEs, which are the biggest job generators." As India grapples with economic challenges, the budget's success in navigating the delicate balance between fiscal responsibility and stimulating growth will be closely watched.

As the Indian government unveils its budget for the 2024-25 fiscal year in the coming weeks, all eyes will be on the delicate fiscal balancing act it aims to achieve. The plans to target a lower deficit amid record infrastructure spending underscore the government's commitment to driving economic growth while ensuring long-term fiscal sustainability.

*Inputs from Reuters*