India’s Modi likely to focus on jobs, incomes in first Budget after election setback

NEW DELHI – Indian Prime Minister Narendra Modi will seek to mend his relationship with voters in the federal Budget to be announced next week, economic analysts said, citing possible steps to boost jobs and incomes as growth in the economy remains uneven and food prices continue to surge.

Mr Modi’s party fell short of reaching the halfway mark in the general election that concluded in June as the issues of jobs and the high cost of living overshadowed his high-voltage Hindu nationalist campaign.

To stay in power, Mr Modi is depending on two fickle regional allies, the Telugu Desam Party and Janata Dal, who control Andhra Pradesh and Bihar states respectively.

Indian Finance Minister Nirmala Sitharaman will table the government’s first Budget of Mr Modi’s third term on July 23, which will provide the first glimpse of any change in its economic policies.

Interim Budget estimates for the 2024 fiscal year that started on April 1 will be replaced by the new Budget.

“We think the Budget will balance economic imperatives with political ones,” said Ms Shreya Sodhani, regional economist at Barclays.

“This would mean the government using the windfall from the RBI dividend and higher tax revenues to fund higher spending, rather than reducing the deficit,” Ms Sodhani said, referring to the central bank, the Reserve Bank of India.

A record US$25 billion (S$33.5 billion) surplus transfer from the central bank will allow the Indian government more room to spend without expanding the deficit. The fiscal deficit target will be retained at 5.1 per cent of gross domestic product, a majority of economists polled by Reuters said.

Over the last three years, the Indian government has nearly doubled spending on long-term infrastructure projects as a way to push growth and generate jobs.

It plans to spend 11 trillion rupees (S$176 billion) on such projects in 2024 and some economists expect an added push to manufacturing in the Budget.

“We expect the government to maintain its focus on promoting domestic manufacturing,” Nomura economists said in a note, adding that they expect an increase in local procurement requirements and the extension of a concessional tax rate for new manufacturing facilities.

The Indian government is expected to also bring in consumption-boosting measures that were missing in the interim Budget presented before the elections.

According to a Reuters report, the Budget may have lower personal income tax for some categories.

“The Indian middle class has been supporting Modi in a very determined way, but for years they have not got much relief,” said political analyst Rasheed Kidwai. “The time has come for the government to give some kind of relief to them.”

The South Asian nation may also increase state subsidies on rural housing and food.

Pandora’s box

Putting the Indian government in a fix, its two key allies have demanded US$6 billion in funds for their states, which could give way to more such demands from others.

Before the election, many states, including those ruled by the opposition like West Bengal and Kerala, claimed they had not got a fair share of funds from New Delhi. The federal government has contested such claims.

“I think that is opening a Pandora’s box,” Mr Kidwai said, referring to the demands from the allies.

He said preferential treatment to the allies would lead to a “lot of heartburn”.

However, one sop that could be offered to states could be an increase in interest-free long-term loans that the federal government offers for infrastructure projects from the current 1.3 trillion rupees.

Axis Bank expects this allocation to increase by 400 billion rupees.

Market borrowings

Despite the spending pressures, the Indian government is likely to maintain or lower its planned market borrowing for 2024, as spending in the first half of the year was slow and tax collections have been strong.

Gross market borrowing will be retained at 14.13 trillion rupees, according to a Reuters poll, but some economists say there is scope to reduce the amount.

Borrowing is expected to be reduced by between 400 billion rupees to 500 billion rupees compared to the interim Budget, JPMorgan estimates. REUTERS