India's Budget 2024: Modi government prioritises fiscal discipline over populism

Ahead of the upcoming general elections, Indian Prime Minister Narendra Modi's government unveiled a budget that steered clear of populist measures and focused on fiscal consolidation to attract investors.

Tax policies remained unchanged, and major subsidies on essential items like food, fertilisers, and fuel were slashed by 8 per cent, signalling a commitment to financial prudence.

Shilan Shah from Capital Economics noted, "This is an indication that the ruling BJP (Bharatiya Janata Party) is feeling fairly confident about securing another big victory in the upcoming general election."

Finance Minister Nirmala Sitharaman announced a sharp reduction in the budget gap for 2024-'25 to 5.1 per cent of GDP, while revising the current fiscal year's gap down to 5.8 per cent.

"In this budget, capital expenditure has been raised to a historic high of 11.11 trillion rupees ($133.90 billion), while keeping the fiscal deficit in control. To put it in the terms of economists, this is a sweet spot,” Modi said.

The fiscal consolidation is anticipated to bolster India's case for a higher sovereign credit rating, currently rated at BBB- by S&P and Fitch, and Baa3 by Moody's.

Reuters cited Sachchidanand Shukla, an economist at Larsen & Toubro, who said, "The interim budget effectively juggled the need to support growth while signalling continued fiscal consolidation. This will be reassuring for investors and rating agencies alike."

Despite the overall positive tone, concerns linger about weak spots in the economy. While India is expected to achieve a remarkable 7.3 per cent economic growth for the financial year ending March 31, 2024, consumption, constituting nearly 60 per cent of GDP, remains sluggish, growing just over 4 per cent.

Garima Kapoor, economist at Elara Capital, told Reuters, "The budget lacks consumption triggers. Thus, it is a departure from the previous pre-election vote on accounts."

Finance Minister Sitharaman addressed the need for affordable housing, pledging to build 20 million houses in the next five years, in addition to the 30 million already constructed. The budget also hinted at a new housing scheme for the middle class, although specific details were not provided.

The government's borrowing plan of 14.13 trillion Indian rupees ($170.33 billion) from the bond markets to fund its fiscal deficit came in lower than expectations. While the budget had a limited impact on equity and currency markets, the better-than-expected fiscal deficit target and lower borrowing estimates boosted gains in the bond market.

The benchmark 10-year bond yield dropped to over six-month lows, currently standing at 7.0467 per cent, and the Indian rupee, initially gaining ground, retreated after briefly rising to 82.9325 against the US dollar.

(With inputs from Reuters)