India Budget Dispels Election Fears

Date: July 24, 2024

On July 23, 2024, Finance Minister Nirmala Sitharaman presented the first budget of the current government, covering the fiscal year 2024-25. The budget had a strong focus on key areas such as employment, skill development, support for micro, small, and medium enterprises (MSMEs), and providing relief for the middle class.

The budget outlined nine priority areas and set aside USD 576 billion in total outlays. These included USD 32 billion for rural programmes and USD 24 billion to create jobs. Alongside the nine priority areas, Finance Minister Nirmala Sitharaman also detailed targeted actions to be implemented in the next five years (Key highlights below).

Importantly, the fiscal deficit target for FY2024-25 was lowered to 4.9% of GDP. That suggests ongoing progress in terms of achieving India’s long-term fiscal consolidation goals. According to the Finance Minister’s speech, the fiscal deficit target was reduced from 6.4% in FY 2022-23 to 5.9% of GDP in FY 2023-24 (Chart 1).

In her interim budget speech prior to the general election, Finance Minister Nirmala Sitharaman stated that the government intends to consolidate the fiscal deficit to 4.5% of GDP by 2025-26. This plan faced the risk of potential populist spending increases if a coalition government were to come into power. With the Bharatiya Janata Party (BJP) failing to secure a majority, investors have grown concerned about the government's ability to stay the course on fiscal consolidation.

The budget dispels fears of a widening fiscal deficit. While the reduction in the deficit target may not be sufficient to warrant an immediate credit rating upgrade from major agencies, it is still a positive sign for markets. In the near-term, the fiscal consolidation efforts could lead to slower economic growth, as the government reins in spending. However, these cyclical headwinds should only be temporary. The Reserve Bank of India (RBI) is expected to start cutting interest rates by Q1 of 2025, if not sooner, which should provide a boost to economic activity.

India’s inflation continues to be moderate, stable, and moving towards the 4.0% target (Chart 2). Core inflation (excluding volatile food and energy prices) is currently 3.1% y/y. Moreover, steps are being taken to ensure that supplies of perishable goods reach markets adequately. In case inflation overshoots RBI’s target, we expect it to decline swiftly, as structural reforms have helped to mitigate the impact of weather fluctuations on food prices.

The market's unease reflects the recognition that a stronger political mandate is often crucial for implementing unpopular but necessary economic reforms. Investors should closely monitor the policy direction of the new government, as well as its ability to maintain fiscal discipline and pursue structural reforms, as these will be crucial for India's economic trajectory going forward.

This article is based on a previous report by UBP.

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Key highlights: Nine Priority Areas

1) Productivity and resilience in agriculture

• Provision of ? 1.52 lakh crore for agriculture and related sectors.
• Development of large-scale vegetable production clusters closer to major consumption centres.
• Release of 109 new high-yielding climate-resilient crop varieties.
• Increase inventories of pulses and oil seeds.

2) Employment and skilling

• Implementation of three new “Employment Linked Incentive” schemes.
• Facilitating higher participation of women in the workforce.
• Centralized scheme targeting to skill 20 lakh youth over 5 years.
• Financial support for higher education in domestic institutions up to ? 10 lakh.

3) Inclusive human resource development

• "Purvodaya" plan to develop the eastern region covering Bihar, Jharkhand, West Bengal, Odisha, and Andhra Pradesh.
• Over ? 3 lakh crore for schemes benefiting women and girls.
• Provision of ? 2.66 lakh crore for rural development and rural infrastructure.

4) Manufacturing and services

• Improving access to credit, enhancing the credit assessment process, and providing targeted support to MSMEs during stress periods.
• Credit guarantee scheme to MSMEs for purchasing machinery and equipment up to ? 100 crore per applicant.
• Development of industrial parks with complete infrastructure in 100 cities.
• Insolvency and Bankruptcy Code (IBC) reforms, including a new online platform to expedite insolvency resolution and the establishment of additional tribunals.

5) Urban development

• Facilitate the development of “Cities as Growth Hubs” and enable brownfield redevelopment of existing cities.
• Over ? 12 lakh crore will be set aside for the provision low-income urban housing.
• Improve water supply and sanitation and solid waste management in 100 cities.

6) Energy security

• Energy transition blueprint that balances employment, growth, and environmental sustainability.
• Scheme to install rooftop solar plants to enable 1 crore households to obtain free electricity up to 300 units every month.
• Research and development of small and modular nuclear reactors.
• Development of indigenous technology for Advanced Ultra Super Critical (AUSC) thermal power plants.
• Provide financial support for MSMEs in 60 clusters to shift to cleaner forms of energy.

7) Infrastructure

• The government will maintain strong fiscal support for infrastructure over the next 5 years, alongside fiscal consolidation.
• Around 3.4% of GDP in capital expenditure to develop and improve infrastructure stock.
• Investment in infrastructure by the private sector will be promoted.
• Financial support for flood control and irrigation projects in Bihar, Assam, Himachal Pradesh, Uttarakhand, and Sikkim.
• Efforts will be made to position India as a global tourist destination, creating jobs, stimulating investments, and unlocking economic opportunities.

8) Innovation, research & development

• Financing pool of ? 1 lakh crore for private sector driven R&D.
• Venture capital fund of ? 1,000 crore to support expansion of the space economy by 5 times in the next 10 years.

9) Next generation reforms

• Land related reforms will be prioritised, both in rural and urban areas.
• Rules and regulations for Foreign Direct Investment (FDI) will be simplified.
• Digitalization of the economy will be stepped up, building on the progress made in the last 10 years.
• Ease of Doing Business will be further enhanced, including through incentivizing states for implementation of their Business Reforms Action Plans and digitalization.
• Data governance, collection, processing, and management will be improved.