Nirmala Sitharaman focusses on fiscal restraint in interim budget; ‘short on vision’, says Congress

Confident of re-election, Modi government prioritises deficit reduction, infra spending, and clean energy.

Union Finance Minister Nirmala Sitharaman during a news conference in New Delhi on February 1. In her last Budget speech before the general election, Sitharaman said that the Central government will increase infrastructure spending by 11 per cent in the coming financial year and curb its fiscal deficit. | Photo Credit: Prakash Singh/Bloomberg

Union Finance Minister Nirmala Sitharaman delivered a Budget speech lacking in any major spending and tax measures to lure voters in the upcoming elections, a sign that Prime Minister Narendra Modi is confident his government can return to power without resorting to populist programmes.

Addressing Modi and lawmakers in New Delhi on February 1, Sitharaman focussed her speech on infrastructure spending, increasing affordable housing, and improving solar energy use. She hailed the economy’s prospects and the government’s achievements in boosting incomes, saying she was hopeful it would be voted back into office.

The Budget was an interim one until a new government takes office, meaning it does not typically include major spending announcements. Even so, economists were surprised by the fiscal restraint, saying it showed the ruling party is in a strong position after recent wins in State Assembly elections and a booming economy. “The political capital is strong after the result of the State polls, so the government doesn’t need too much populism,” said Garima Kapoor, an economist at Elara Securities India Ltd. “Fiscal consolidation is the broader theme.”

Managing Budget deficit

The government plans to cut its Budget deficit sharply in the coming fiscal year beginning April, reducing it to 5.1 per cent of GDP—lower than the 5.3 per cent predicted by economists in a Bloomberg survey. The deficit for the current year (2023-24) was revised down slightly to 5.8 per cent. The smaller-than-expected deficit and the cut in borrowing for next year prompted a rally in bonds. The yield on the benchmark 10-year bond fell as much 11 basis points to 7.04 per cent on February 1. Stocks and the rupee were little changed.

Key Highlights: Interim Budget 2024

Gross government borrowing is projected at Rs.14.13 trillion in the fiscal year starting April 1, lower than the Rs.15.2 trillion estimated in a Bloomberg survey of economists. Net borrowings, adjusted for maturities, are planned at Rs.11.75 trillion for the next fiscal year.

Sitharaman did not make any changes to tax rates for individuals, while extending tax benefits for startups to March 2025.

Fertilizer subsidies will be cut to Rs.1.64 trillion next year, while the allocation for food subsidies was reduced to Rs.2.05 trillion.

The government will support offshore wind as a step toward its net zero ambitions. The finance minister also reiterated an intention to install rooftop solar panels over 10 million homes.

The government plans to raise Rs.500 billion from the sale of state assets in the next fiscal year, after missing this year’s target. Dividends from state-owned companies are projected to reach Rs.480 billion next fiscal year, with transfers from the Reserve Bank of India and state-owned banks expected to reach Rs.1.02 trillion.

The Budget allocated about Rs.11 trillion ($134 billion) for capital spending, an increase of 11.1 per cent from the previous year. The government had ramped up capital expenditure by almost a third annually in the past three years. “The Budget has hit the right notes,” said Gaurav Kapur, an economist at IndusInd Bank Ltd. “Accelerated fiscal consolidation is being pursued, helped by improving tax collections, while maintaining the capex push.”

The government has been steadily reining in the budget deficit after it surged to 9.2 per cent of GDP during the pandemic, pledging to bring it down to 4.5 per cent by the 2025-26 fiscal year. Curbing the deficit and debt will help boost India’s credit rating outlook and improve the allure of the nation’s bonds to foreign investors ahead of India’s inclusion in global bond indexes in June.

Moody’s Investors Service will hold its assessment on India’s credit rating after the full budget in July, Christian de Guzman, a sovereign analyst, said in an interview on February 1. He said it remains to be seen if the fiscal consolidation plans are achievable, given challenges to global growth, and the knock-on effect that would have for India. Moody’s has a stable outlook on India’s Baa3 rating, the lowest investment grade level.

Advantage Modi

Modi’s State election wins, popularity among his Hindu voter base, and a weakened political opposition gives him an advantage in the upcoming election. The economy is also outperforming its peers, with the government predicting 7.3 per cent growth in the current fiscal year, and the Finance Ministry this week forecasting expansion of about 7 per cent in the coming year.

Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Ltd., said the Budget restraint will help bolster the economy’s prospects. “This was not a pre-election Budget,” she said. “While the Budget speech talked a lot about the key voter constituents, it has chosen to prioritise fiscal consolidation. This bodes well for macro stability and will be seen as positive by the Reserve Bank of India as well.”

Meanwhile, the Congress said that the interim budget was missing on both accountability and vision and questioned how many of the promises made in the last ten years have been fulfilled. The opposition party alleged that the ruling NDA’s approach to the economy and governance is biased in favour of the rich and the budget neither talks about the promised two crore jobs every year nor about taming inflation or doubling farmers’ incomes.

“It is a government of the rich, by the rich and for the rich,” former finance minister P Chidambaram alleged. Congress president Mallikarjun Kharge said the finance minister has said that they will present a white paper on the previous government. “In this context, we ask the Modi Government, how many of the promises made by the government in the last 10 years have been fulfilled,” he said, adding only big dreams have been shown to people, schemes relaunched by changing names, but what happened to old promises has not been told. “How will the new dreams being shown get fulfilled,” he asked.

(With inputs from Bloomberg and PTI)