Prime Minister Narendra Modi will likely use India’s last budget before the elections to woo voters with new spending measures, while avoiding a fiscal deficit increase.

Interim Budget 2024: Union finance minister Nirmala Sitharaman

The economy’s rapid expansion has led to a tax windfall for the government, helping it meet its goals of curbing the deficit. That means Finance Minister Nirmala Sitharaman, who will deliver her sixth budget speech on Feb. 1, has scope to keep infrastructure spending going and take targeted steps to support Modi’s priority sectors for the elections: farmers, women, the poor and young people.

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But don’t expect a spending spree either, economists say. The budget this week is an interim one until a new administration takes office, and the finance minister has already hinted there won’t be any major announcements.

“It’s likely to be watched for the pace of fiscal consolidation and policy priorities ahead,” said Madhavi Arora, an economist with Emkay Global Financial Services Ltd.

Modi is also in a strong position to extend his decade in power in upcoming elections, so there’s less pressure to take populist steps, Bloomberg Economics’s Abhishek Gupta said in a report. The fiscal plan is expected to signal policy continuity, he said.

Here’s what to watch for in the budget speech, which is usually delivered around 11 a.m. in New Delhi.

Deficit and Borrowing

After surging to 9.2% of gross domestic product during the pandemic, the government has been steadily bringing down the fiscal deficit to keep debt under control. The 5.9% deficit target for the current fiscal year ending in March will likely be met, and lowered further to 5.3% in the next financial year, according to economists surveyed by Bloomberg.

A large part of the improvement in the budget deficit this year has come from soaring tax receipts. Income tax is almost 30% higher than collected in the last fiscal year, corporate tax is up 20% and GST is 10% higher, according to HSBC Holdings Plc.

The government has pledged to bring the budget deficit down to 4.5% over time, but it’s also funneling more of its spending to items such as infrastructure and curbing subsidies, which bodes well for the economy’s growth outlook, HSBC’s economists wrote in a note.

Borrowing will likely remain near a record of around 15 trillion rupees ($180.5 billion) in the coming fiscal year, according to the Bloomberg survey, although that’s unlikely to be a worry for the bond market since overseas demand is set to surge this year when India is included in global bond indexes.

Infrastructure Spending

The government ramped up capital expenditure by almost a third annually in the past three years, prioritizing spending on roads, ports and power plants. That’s helped to underpin economic growth of more than 7%, according to official forecasts, making India the fastest-growing major economy.

Radhika Rao, an economist at DBS Group Holdings Ltd., expects the pace of infrastructure spending to ease, though still remain fairly elevated at 9-10%.

Rural Welfare

Economists expect the government to give farmers more financial support after a number of aggressive steps it took last year to curb soaring food prices — like banning exports of rice, wheat and sugar — reduced farmers’ incomes. Poor rainfall also affected crops, hurting prospects in rural areas, where about 65% of India’s 1.4 billion people live.

Modi’s government has already increased subsidies on cooking gas and fertilizers, and extended a free food program for 800 million people for five years, at a cost of $142 billion.

Jefferies India Ltd. analysts expect welfare spending to pick up, with some popular programs like the farmer income transfer, housing for all and health insurance being expanded. Social spending excluding subsidies may increase by as much as 8% in the coming fiscal year that begins in April, compared with a 4% increase this year, the analysts wrote in a note.

Local media reports suggest the government may create a social security fund for workers in the informal sector, including gig jobs.

Women Voters

To help lure more women voters, Modi’s government has boosted cooking gas subsidies and provided cheaper loans to them. Analysts expect the budget will outline more support measures targeted toward women, given the prominent role they will play in the upcoming elections.

The plan to give free gas cylinders to women “could see a higher outlay amid the government’s vision to extend the program to 7.5 million new beneficiaries over the next three years,” QuantEco Research economists led by Shubhada Rao wrote in a note.

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