Modi government ramps up spending, cuts deficit in Union Budget ahead of 2024 elections

BJP faces elections in key states this year and a national vote in 2024

The Centre on Wednesday unveiled one of its biggest jumps in capital spending in the past decade in its budget for the coming year and said the fiscal deficit would fall, as it tries to create jobs while maintaining financial discipline.

Prime Minister Narendra Modi's Bharatiya Janata Party (BJP), which faces elections in key states this year and a national vote in 2024, has been under pressure to create jobs in the country of 1.4 billion where many have struggled to get employment despite it remaining one of the world's fastest-growing major economies.

"After a subdued period of the pandemic, private investments are growing again," Finance Minister Nirmala Sitharaman said as she presented the 2023/24 budget in parliament, with total spending rising 7.5 per cent to Rs 45.03 lakh crore ($549.51 billion).

Also Read: Budget 2023: Govt to borrow Rs 15.4 L cr to bridge revenue gap

"The budget makes the need once again to ramp up the virtuous cycle of investment and job creation. Capital investment is being increased steeply for the third year in a row by 33 per cent to Rs 10 lakh crore."

The capital spending increase to about $122.3 billion, which would amount to 3.3 per cent of gross domestic product (GDP), in the next fiscal year starting on April 1 will be the biggest such jump after an increase of more than 37 per cent between 2020/21 and 2021/22. "In the backdrop of an anticipated slowdown in global growth, reliance on public capex as a countercyclical policy will help in supporting overall growth," said Vivek Kumar, an economist at QuantEco Research in Mumbai.

The finance ministry's annual Economic Survey, released on Tuesday, forecast the economy could grow 6 per cent to 6.8 per cent next fiscal year, down from 7 per cent projected for the current year, while warning about the impact of cooling global demand on exports.

Sitharaman said that despite a global slowdown because of the Covid-19 pandemic and the Russia-Ukraine war, the Indian economy was "on the right track".

Sitharaman said the government would target a budget deficit of 5.9 per cent of GDP for 2023/24, down from 6.4 per cent for the current year. A Reuters poll had pegged the deficit for the next fiscal year at 6 per cent.

Also read | Infrastructure development capex hiked by 33% to Rs 10 lakh crore for 2023-24: FM Sitharaman

The deficit plan will be aided by a 28 per cent cut in subsidies on food, fertiliser and petroleum for the next fiscal year at Rs 3.75 lakh crore. The government cut the spending on a key rural jobs guarantee programme to 600 billion rupees - the smallest in more than five years - from Rs 89,400 crore for this fiscal year.

Moody's Investors Service said the narrower fiscal deficit projection pointed to the government's commitment to longer-term fiscal sustainability.

"Although the gradual fiscal consolidation trend remains intact and will help to stabilise the government's debt burden relative to nominal GDP, the high debt burden and weak debt affordability remain key constraints that offset India's fundamental strengths, including its high growth potential and deep domestic capital markets," said Christian de Guzman, its senior vice president.

The government's gross market borrowing is estimated at Rs 15.43 lakh crore ($189 billion) for the next fiscal year, while net borrowing is seen at Rs 11.8 lakh crore.

Since taking office in 2014, Modi has ramped up capital spending including on roads and energy, while wooing investors through lower tax rates and labour reforms, and offering subsidies to poor households to clinch their political support.

After Sitharaman revealed the capital spending jump, ruling-party lawmakers thumped their desks as the camera moved to Modi.

A lack of enough and well-paying jobs for young people has been one of the biggest criticisms of Modi, who is still widely projected to win the general election.

Indian shares rose after the government raised the minimum tax rebate limit to Rs 7 lakh rupees from Rs 5 lakh rupees earlier and stepped up spending. Bond yields moved lower after it lifted gross borrowing.

The surcharge on annual income above Rs 5 crore has been cut to 25 per cent from 37 per cent.

Sitharaman said the aim was to have strong public finances and a robust financial sector for the benefit of all sections of the country. She also allocated 350 billion rupees for energy transition, as Modi focuses on green hydrogen and other cleaner fuels to meet the country's climate goals.