By Shivangi Acharya
NEW DELHI (Reuters) – Indian Prime Minister Narendra Modi may seek to shore up faltering economic growth, placate a middle class squeezed by high prices and low wage growth, and prepare for an uncertain year of global trade in the nation’s budget this week.
Finance Minister Nirmala Sitharaman will present the budget for the next fiscal year on Feb. 1 at 0530 GMT.
The budget may provide a policy boost for the world’s fifth-largest economy, which is expected to post its slowest pace of growth in four years, amid frail urban demand and inflation risks fuelled by a weak currency.
Economists expect measures to raise disposable incomes and tariff cuts to encourage local manufacturing.
“We could see a nod from the government, to signal to the middle class that we aware of your challenges and we would like to raise disposable incomes, which increases spending power,” Priyanka Kishore, director and principal economist at research firm Asia Decoded said.
Reuters reported last month that India is considering cutting tax on personal incomes to provide some relief.
The budget could also introduce tax cuts on fuel prices or cooking gas, Dhiraj Nim, an economist at ANZ said.
Despite world-beating growth, India’s job market offers insufficient opportunities for its large youthful population to earn regular wages.
In the last budget, India earmarked nearly $24 billion to be spent over five years in various schemes to create jobs but those programmes have not yet been implemented as discussions on details drag on.
“They will focus more on direct measures for employment generation and skilling,” Kishore said.
India will also have to cope with possible global disruptions from U.S. President Donald Trump’s trade policies.
To support local production, the government could offer concessional tax rates to companies that use the country as a manufacturing hub, lower custom duties on intermediate inputs and raise tariffs to counter goods dumped from China, Nomura economists said in a note.
India will also see an opportunity to clinch a larger share from further global supply chain shifts spurred by Trump’s new tariffs, Nomura economists said.
To that effect, India has drawn up a list of products that act as inputs for various local production units and is considering cutting import taxes on them, a senior government sources aware of the matter said.
The list likely includes components for mobile phone assembly such as printed circuit board assembly, parts of camera modules, and USB cables, two industry sources said.
The government source and the two industry sources, who joined the finance ministry’s budget consultations, refused to be identified as such discussions were private.
Moreover, India may also boost its textile and garment industry with financial support, tariff cuts on key inputs and incentives to produce locally, as a political crisis has hit neighbouring Bangladesh’s exports.
The budget is also likely to continue to prioritise spending on infrastructure, ICRA economists said in a note.
Government infrastructure spending has been key to India’s strong growth in recent years, though it is likely to undershoot a record spending allocation of 11.1 trillion rupees($128.22 billion) in the current fiscal year.
India also plans to raise its spending for the agriculture sector by about 15%, marking the biggest increase in six years, and moderately increase key subsidy payouts to sustain a recovery in its rural economy.
FISCAL BALANCE, GROWTH HOPES
In the budget, India plans to project higher economic growth for the next fiscal year, Reuters has reported, an upbeat outlook that could help dispel worries over an economic slowdown which have bothered investors and equity markets since October.
Indian stocks are set for their longest monthly losing streak in over 23 years, tumbling from record highs in September.
However, the government will be walking a fine line on support measures given its relative lack of fiscal space, ANZ’s Nim said.
“The fiscal debt-to-GDP ratio is still over 80%, which is very high for emerging markets … It needs to be brought down,” Nim said.
India is likely to continue fiscal consolidation and pursue its targeted fiscal deficit of 4.5% of gross domestic product for the next financial year that starts April 1, a Reuters poll of economists found.
That will put the onus of reviving the economy on the central bank.
Economists polled by Reuters forecast New Delhi’s gross borrowing at 14.28 trillion Indian rupees ($164.95 billion) in the next fiscal year, up from this year’s 14.01 trillion rupees borrowing.
($1 = 86.5725 Indian rupees)
(Editing by Kim Coghill)
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