Free foodgrains may not be a worry for budget gap

The Indian government will likely stick close to its fiscal deficit target and the consolidation path till fiscal year 2026, despite the extension of the free foodgrain scheme announcement and the possibility of more such expenditure initiatives as India heads towards general elections next year, S&P researchers said Wednesday.

“More expenditure initiatives are possible as we move through this election cycle. In the very near term, these could be supportive of consumption, but they are unlikely to have a major impact on medium-term finances,” said Andrew Wood, Director, Asia Pacific Sovereign Ratings. S&P Global Ratings at the launch of Asia Pacific Credit Outlook 2024.

Prime Minister Narendra Modi last week announced another extension of the free foodgrain scheme, started during the pandemic, for another five years.

“The government is likely to stick pretty closely to its fiscal deficit target, especially at the centre and its fiscal glide path through to the year FY26, even after the food scheme, which we see at about 0.7% of GDP,” Wood said.

The government plans to bring down the fiscal deficit from 5.9% of the GDP in FY24 to 4.5% in FY26.

“Revenue growth remains supportive and we expect that will continue. The targets the centre has set are very gradual in terms of pace of consolidation and there is some pace to manoeuvre within the glide path, as long as the economy stays pretty strong,” Wood added.

S&P, in its commentary, noted that India’s growth is likely to bounce back again to 6.9% in FY25 and stay around the level till FY27.

Vishrut Rana, S&P Global Ratings Senior Economist (Asia Pacific) said that growth next year would be supported by stronger urban services activity and better rural activity.

“Gradual capital deepening, favourable demographics, and improving productivity are essential growth factors,” the rating agency noted.

However, it also pointed out that labour force participation, climate resilience, and further improvements in the business environment were challenges in unlocking the next growth phase.

S&P expects the Reserve Bank to lower rates by another percentage point by FY25.

S&P stated that the share of the services economy is expected to grow and infra investments to double within the next six years.

The infrastructure investment is expected to rise to $1.7 trillion between 2024-2030, up from $800 billion from 2017-23.

“India is called the land of potential, it is closer to realising some of it,” said Managing Director Infrastructure Ratings, S&P Global.

Harry Byrne

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