India Embraces Budgetary Caution – And Infrastructure


A year away from national elections, New Delhi is resisting urge to splurge on subsidies

By guest author Megha Mandavia from the Wall Street Journal.

New Delhi fought off its populist impulses and clawed back some fiscal space this week, announcing a relatively conservative federal budget.

Falling spending on subsidies should give a large assist—but realizing the country’s big infrastructure push will still be a lift. That would be particularly true if public markets continue shunning infrastructure heavyweight Adani Group.

On Wednesday, New Delhi unveiled a 45 trillion Indian rupee, equivalent to USD 550 billion, budget for the next fiscal year starting in April. Expenditures would grow just 7.5 %, according to figures from data provider CEIC.

The government forecasts a budget deficit of 5.9 % of gross domestic product, down from 6.4 % in the current fiscal year. And India’s Finance Minister Nirmala Sitharaman expressed confidence that the gap could fall to 4.5 % by fiscal year 2026.

Heavy spending on new infrastructure is the key item, in line with India’s solidifying ambition to present itself as a credible manufacturing alternative to China.

Ms. Sitharaman called for record spending of 10 trillion Indian rupees, equivalent to about
USD 122 billion, on infrastructure, up by a third. The government will give priority to 100 new projects, extend long-term loans for states to undergird their own infrastructure investment, and earmark the equivalent of USD 4.3 billion for energy security and the green transition.

All this would require collecting about 23.3 trillion Indian rupee in taxes, up 12 % from the amount expected this financial year, and borrowing another 15.4 trillion Indian rupee, a record sum.

Still, it is obvious that for the first time in three years, the pandemic is no longer the driving force in India’s fiscal policy. With private capital expenditure yet to take off, the government knows that public capital spending needs to continue. And with economic growth expected to slow next year due to a possible recession in developed markets and the lagged effect of tighter monetary policy, India has decided to stay on the good side of credit-rating firms by running a tighter ship.

Lower oil prices, and therefore, petroleum and fertilizer subsidies should be a big help. But the government is also taking the politically difficult step of phasing out some food and energy subsidies ahead of several state elections and the coming national elections in 2024. Spending on major subsidies would fall to 9 % of expenditures, which would be the lowest percentage since at least 2016, according to data from CEIC.

Still, India’s high debt burden remains a constraint on its ambitions. Total state and central government debt is about 85 % of GDP, according to Moody’s. The credit-rating firm notes that the new budget anticipates that nearly a quarter of total spending would be interest payments. Growing the economy—and tax revenue—quickly enough to whittle that down will be critical if India wants to keep beefing up its infrastructure at a rapid rate.

On that front, the outlook is pretty good, however: the government forecasts that India will grow 7 % in the year ending in March 2023, and another 6.5 % the following year. Fast growth can have a fiscal logic all of its own.