Budget to be fiscally prudent without losing growth focus: DBS economist

The Indian government will target reducing its budget deficit ahead of the upcoming national election in 2024 without losing focus on long-term economic growth, DBS Bank's chief economist told Reuters on Monday.

"We expect the budget to chart a path towards some fiscal consolidation," said Taimur Baig, who is also a managing director at DBS.

"Demand moderation is a sensible strategy to pursue, even as the seeds for long-term growth are sown through infrastructure investment and strategic planning," he added.

DBS Bank expects the government to target a fiscal deficit of 5.8-5.9% of gross domestic product (GDP) in 2023/24 as against the 6.4% outlined for this financial year ending on March 31.

Indian finance minister Nirmala Sitharaman will present the federal budget for the next financial year on Feb. 1. This is the last full one ahead of the general election in May 2024.

The government has said it aims to bring down its fiscal deficit to 4.5% by fiscal 2025/26.

A Reuters poll of economists expects the government to focus on fiscal consolidation in the upcoming budget as slowing economic growth would limit it from spending more.

MACRO VULNERABILITIES

India's macro vulnerabilities are not trivial, said DBS Bank's Baig, as there is "substantial" debt at the central government level. Corporates' debt-to-GDP ratios are not low, either, compared to international standards.

Dollar borrowings are also posing concerns, he added.

The government will likely be cognisant of slowing growth in the United States, following multiple interest rate hikes by the Federal Reserve, which could hit demand for exports from emerging markets, Baig said.

"India does not exist in a cocoon."

In India, too, interest rates are expected to stay elevated in 2023 as domestic-driven inflation is unlikely to come down sufficiently for the central bank to start thinking about cutting rates, according to Baig.

DBS Bank expects the terminal repo rate to peak at 6.50%.

"The fact that real interest rates, both in rupee and dollar terms, will be higher is an additional disincentive on top of the fact that global demand will be hampered," said Baig.

"Although the sentiment is positive, there's a global cyclical headwind that will also affect the Indian investment sentiment."

 

(Additional reporting by Shritama Bose; Editing by Swati Bhat and Janane Venkatraman)