NEW DELHI/MUMBAI: India is preparing a stepped-up deficit reduction plan in its annual budget due out next month, two government officials said, holding fast to fiscal targets that will require deep spending cuts and could pose fresh risks in a slowing global economy.

Government officials had already flagged steep cuts to food and fertiliser subsidies that helped households and businesses weather the pandemic, and one of the officials added that growth in government capital investment - a key driver for one of the world’s fastest growing major economies - will also be curbed.

The two officials said the government will aim to cut its fiscal deficit to 5.8-5.9% of GDP in the year from April 1, from an estimated 6.4% in the current year, and will stick to its broader target set last year of reaching 4.5% by 2025/26.

The officials, who are familiar with discussions on the government budget that is due for release on Feb, 1, declined to be named because the discussions are confidential.

“The government is very sensitive to the fiscal deficit number and is very keen to bring it down in line with the glide path they have laid down,” one of the sources said.

With India’s currency near record lows, its quarterly current account deficit at nine-year highs and government borrowing at record amounts, the authorities have little room for error as they navigate a tough global environment of high inflation and a looming risk of recession.

The easing threat from the pandemic, economists say, gives the government some leeway to pull back on spending like subsidies, but it must walk a finer line on investment: public capital spending remains critical to sustain growth, although heavy government borrowing risks crowding out private investment.

“Indeed, the reduction in the fiscal deficit could somewhat curtail fiscal support to growth, but objectively the quality of fiscal expenditure is of greater importance,” said Yuvika Singhal, an economist at QuantEco Research.