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Budget 2023: India’s economic potential will meet the target of increasing 25% of GDP from the current 14%

India will present its budget 2023 on Wednesday, a test of Prime Minister Narendra Modi‘s fiscal strength seen as key to boosting investor sentiment, although he is likely to leave less room to give away a year before he seeks a third term in office.

Modi, riding a sustained wave of popularity as his second term draws to a close, looks poised to maintain fiscal consolidation as he takes to the global stage with India’s chairmanship of the Group of 20 nations. Reducing the deficit, which reached a record 9.2% of gross domestic product during the first year of the pandemic, is necessary for Asia’s third-largest economy to improve its credit rating, which is currently at the lowest investment grade.

India recently restructured the world’s largest food program and cut energy subsidies to allow for government savings of around 1 trillion rupees ($12.3 billion). A survey of more than 20 economists this month showed most expect the budget from the fiscal year starting in April to avoid populist measures and focus on boosting manufacturing and job creation.

 Avoiding wasteful spending is critical to India’s strong, long-term growth as it frees up funds to build more roads and ports, improving logistics links that will support Modi’s ambitions to make India a new global power without inflating the deficit to 6.4 % of GDP in the year ending March.

 The fiscal consolidation is in line with Modi’s first budget in 2014. He is expected to improve that record as he becomes the first to lead arguably the world’s most populous country.

A review of budgets since Modi came to power shows he has cut subsidies, except during the pandemic years when aid saw a surge. The government is pushing to put its fiscal house in order, even at the risk of upsetting Modi’s loyalist base, for example. Provisions for subsidizing LPG used for cooking for the current fiscal year were reduced to 58.1 billion rupees from 352 billion rupees two years ago.

“The cost of fuel is hurting us the most right now,” said Nupur Kaushik, a 37-year-old New Delhi resident who is also pushing for lower taxes and incentives for working women.

HSBC Holding Plc’s chief India economist Pranjul Bhandari said the country’s path to fiscal consolidation will require Herculean efforts. “Think of it as a long-distance cyclist who has to keep pedaling to reach the finish line.”

India’s prime minister has a year to make political amends ahead of elections in the summer of 2024 if fiscal prudence looks set to hurt his party’s poll chances. State elections this year will show whether Modi’s popularity can withstand tough measures. Next year’s provisional budget will also create some room for the premiere.

“Fiscal pressures could arise from the upcoming national elections,” said Fitch Ratings Ltd., which has a BBB- rating for India. “However, the dominant political position of the current government likely limits these risks.”

Under Modi, India became the fifth largest economy in the world. Looking outward, it must tap into the country’s full economic potential and meet the target of increasing the share of manufacturing to 25% of GDP from the current 14%. This will help the nation overtake Japan to become the world’s third largest economy by the end of the decade.

A year ago, Finance Minister Nirmala Sitharaman presented a vision of how to manage the economy for the next 25 years. This includes accelerating growth through investment in infrastructure and increasing agricultural production to reduce dependence on imports, including oilseeds.

So far, these measures have not translated into gains for Modi supporters like Trilok Chand, a resident of Tibbi village in Himachal Pradesh.

“Whatever we get from farming is not enough for my family of four,” said Chand, who grows rice and wheat on his small one-acre farm. “The prices of all items are very high,” he said, wishing the government would ensure lower prices of basic commodities. “If they don’t, they will repent.”

Written By: Vaishali Verma

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