India’s government will rework the federal budget on Friday and revise its borrowing target slightly higher for this year and next, marred by a slowing economy and weak jobs growth, a Reuters poll of economists showed.
After winning a second term a month ago, Prime Minister Narendra Modi’s government’s first budget since then is forecast to echo an interim budget from February in borrowing to spend more on social welfare.
The median forecast in the series from the June 28-July 2 poll of over 45 economists showed the government will revise its fiscal deficit target up to 3.5% of gross domestic product (GDP) for the current fiscal year and 3.3% for 2020-21.
That is up from 3.4% and 3.0%, respectively, projected in the interim budget.
The view is that Sitharaman will announce loosening measures and relax the deficit targets for this year and next, said an Indian economist.
With government debt levels already high, by emerging market standards, that might cause bond yields to rise slightly. This would however be a better outcome than making revenue assumptions that lack credibility and force the finance ministry to relax the deficit targets further down the line, he added.
Recently, India has managed to rein in the budget deficit, mostly through higher fuel taxes and subsidy cuts. But the concern now is how Sitharaman will maintain fiscal prudence when tax revenues have shrunk more than previously expected.
The fiscal deficit is already over half the budgeted target for the current fiscal year, which started only two months ago, and the implementation of pre-election promises is set to widen it further.
Around 60% of economists, 21 of 37, who answered an additional question about the focus of the budget said it would be more on fiscal expansion than prudence.
But when asked if the government will also try to limit borrowing to the 7.1 trillion rupees ($103.1 billion) pegged in the February interim budget, a two-thirds majority, 25 of 38, said yes.
While the expected rise in fiscal slippage is minimal, a majority of economists also forecast the government to increase spending by stirring expenditure outside the budget, often called “off-budget expenditure”, to project better fiscal discipline.
