Budget 2024: Will the Modi government present a populist Interim Budget?

Budget 2024: Before the general election, Prime Minister Narendra Modi is likely to change the usual pattern of big spending on new welfare programs. Instead, the emphasis will be on infrastructure spending to maintain economic growth and reduce the fiscal deficit, according to a Reuters report.

Finance Minister Nirmala Sitharaman is set to unveil Budget 2024 on February 1. Economists predict a budget that leans towards political messaging, emphasising the Modi government's commitment to inclusive growth while adopting a cautious approach to spending.

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According to Citigroup economist Samiran Chakraborty, the government is likely aiming for a balance between pre-election messaging, fiscal consolidation, and continued focus on capital expenditure (capex). For instance, a potential move to double the annual payment to female farmers to Rs 12,000, seen as an appeal to women voters, would cost only $1.44 billion annually, a relatively small amount in the government's overall spending, the report said.

Key subsidies are expected to remain consistent at around $48 billion, signalling a conservative approach to spending.

PM Modi has extended the free foodgrain program for the next five years. This extension is expected to involve minimal additional spending, given that the subsidized foodgrain program has been in operation for several years. Additionally, the government plans to cut down its fiscal deficit by at least 50 basis points in the fiscal year 2024-25. The current target for the ongoing fiscal year is 5.9% of the GDP.

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Despite opposition criticism about youth unemployment, the government is expected to persist in substantial infrastructure spending. Additionally, efforts will be made to attract both foreign and domestic manufacturers to invest by offering incentives. The overarching goal is that these growth-oriented policies will eventually lead to job creation.

The government's plan to decrease the fiscal deficit in an election year indicates a lesser reliance on social spending to win voters. Instead, the emphasis is on leveraging PM Modi's popularity, which played a crucial role in recent state election victories.

Shilan Shah, Deputy Chief Emerging Markets Economist at Capital Economics, remarked that given it is a general election year, there could be a temptation within the ruling Bharatiya Janata Party (BJP) to announce substantial fiscal giveaways.

Shah further added that, given the BJP's impressive performance in recent state elections, the party is likely to realize it has enough political support. This realization is expected to lead to a balanced approach, addressing the need for fiscal giveaways while still pursuing the long-term goal of reducing the fiscal deficit.

Growth and strategic spending in focus
Fueled by government spending, India experienced a robust 7.6% economic growth in the July-September quarter. The forecast for the full year ending on March 31 is an impressive 7.3%, making it the world's fastest-growing major economy.

An increase of up to 20% year-on-year in capital expenditure is expected for the fiscal year 2024-25. Deutsche Bank notes that the strategy of enhancing on-budget capital expenditure is likely to continue, facilitating the private sector investment cycle to gain momentum.