NEW DELHI – India will unveil its budget on Wednesday, testing Prime Minister Narendra Modi’s fiscal mettle seen as key to boosting investor sentiment, even as it will likely leave less room for handouts a year before he seeks a third term.

Mr Modi, who rides an enduring wave of popularity as his second term is coming to a close, looks poised to sustain fiscal consolidation as he takes the global stage with India’s presidency of the Group of 20 nations.

Shrinking the deficit, which hit a record 9.2 per cent of gross domestic product during the first year of the pandemic, is necessary for Asia’s third-largest economy to improve its credit rating, currently at the lowest investment grade.

India recently restructured the world’s biggest food programme and trimmed energy subsidies to enable about 1 trillion rupees (S$16 billion) in government savings.

A Bloomberg survey this month of more than 20 economists showed that the majority expects the budget, for the fiscal year starting April, to steer clear of populist measures and focus on strengthening manufacturing and creating jobs.

Shunning wasteful expenditure is crucial for India’s robust, long-term growth as it frees up funds to build more roads and ports and enhance logistic linkages that will support Mr Modi’s ambition to make India the new global powerhouse, without bloating the deficit capped at 6.4 per cent of GDP in the fiscal year ending in March.

Fiscal consolidation is in keeping with Mr Modi’s first budget in 2014. He is expected to further burnish those credentials as he becomes the first to lead what is likely now the world’s most populous nation.

A review of budgets since Mr Modi came to power shows that he has been chipping away at subsidies, barring the pandemic years, when assistance saw an increase.

The government is pressing ahead with putting the fiscal house in order even if it risks, for instance, upsetting Mr Modi’s loyal base of women voters. Provisions for subsidising liquefied petroleum gas used for cooking for the current fiscal year were lowered to 58.1 billion rupees from 352 billion rupees two years ago. 

“Fuel costs are hurting us the most right now,” said Ms Nupur Kaushik, a 37-year-old New Delhi resident, who also seeks lower taxes and incentives for working women.

HSBC Holding chief India economist Pranjul Bhandari said the nation’s path to fiscal consolidation will require a herculean effort. “Think of it like a long-distance cyclist that needs to keep pedalling hard to reach the finish line,” she said.

The Prime Minister still has a year, before elections are due in the summer of 2024, to correct the course politically if it looks like fiscal prudence is going to hurt his party’s chances at the ballot.

State elections in 2023 will indicate whether Mr Modi’s popularity can weather tough measures. An interim budget in 2024 will also create some wiggle room for the Premier.

“Fiscal pressures could arise from upcoming national elections,” said Fitch Ratings, which has a BBB rating for India. “But the incumbent government’s dominant political position likely limits these risks.”

Under Mr Modi, India has risen to become the world’s fifth-largest economy.

As he looks outward, he must harness the country’s full economic potential and meet the target of boosting the share of manufacturing to 25 per cent of GDP from 14 per cent now. This will help the nation gain on Japan to become the world’s third-largest economy before the end of the decade.

A year ago, Finance Minister Nirmala Sitharaman laid out a vision to steer the economy through the next 25 years. It involves spurring growth through infrastructure investment and increasing agriculture output to cut reliance on imports, including oilseeds.

Those measures have not translated into gains yet for a Mr Modi supporter like Mr Trilok Chand, a resident of Tibbi village in Himachal Pradesh.

“Whatever we are getting from farming is not enough for my family of four,” said Mr Chand, who grows rice and wheat on his small 0.4ha farm.

“Prices of all items are very high,” he said, wishing for the government to ensure lower prices of essential commodities. BLOOMBERG