India plans to lower budget gap by at least 50 bps, raise capital spending as much as 20% in FY25

NEW DELHI: India is planning to lower its budget deficit by at least 50 basis points in 2024/25 from this year’s target of 5.9% of gross domestic product (GDP), while also looking to raise capital spending by as much as 20%, two government officials said.

Shrinking the fiscal deficit and yet at the same time increasing capital spending will depend on an increase in revenues and efforts to curb subsidies, said Devendra Pant, an economist at India Ratings.

Moves to cut welfare spending and subsidies would be unusual for a government facing a national election in just a few months, but Prime Minister Narendra Modi is widely expected to win a rare third term.

Finance Minister Nirmala Sitharaman will unveil the 2024/25 budget on Feb. 1.

The plan to lower the fiscal deficit by at least 50 basis points is being discussed along with other scenarios for the budget year starting in April, one of the two sources said.

Both the officials also said the government is confident of meeting its 5.9% target for the current year ending on March 31.

The government is trying to raise capital spending on building infrastructure to as much as 12 trillion rupees ($144.59 billion) from the current year’s plan of 10 trillion rupees.

Over the past few years, the government’s push to increase spending on infrastructure has been the main driver in making India one of the fastest growing economies in the world, despite high inflation slowing consumption in the Asian country.

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A sharp cut in the fiscal deficit will come as a relief to foreign investors and rating agencies that have doubts about India achieving its goal to narrow the deficit to below 4.5% of GDP in the next two years.

The government is also mindful of the target as a new set of investors would be carefully assessing the government’s debt levels following their inclusion in the JPMorgan and Bloomberg emerging market indexes.

India’s finance ministry did not immediately respond to an email seeking comment.