India's budget: balancing infrastructure, subsidy cuts and a lighter debt load

India's budget will be presented on Feb. 1, with most observers expecting restraint with a view to whittling down the post-pandemic debt load.

Finance Minister Nirmala Sitharaman is tasked with lowering the nation's interest payments and obtaining a sovereign rating upgrade from international credit agencies -- while also supporting Prime Minister Narendra Modi's ambitious growth plans with infrastructure spending. (The budget comes in the wake of Modi's election disappointment last year, which saw the prime minister retain power but lose his party's electoral majority for the first time in a decade.)

To visualize how Sitharaman might balance competing priorities, we've charted India's capital spending (as a proportion of gross domestic product) against the nation's subsidy spending – which soared during the pandemic.

India subsidizes prices for goods ranging from fuel to fertilizers and food. (Indeed, expenditure in this category soared during the pandemic, as our chart shows; the Russia-Ukraine war also sent fertilizer prices higher, prompting Modi to spend on shielding farmers from those extra costs.)

Amid a fast-growing economy, subsidies have since been constrained to 1.3% of GDP, near pre-pandemic lows. Capital spending, meanwhile, has kept climbing: it stands at 3.4% of GDP, the highest proportion in at least a decade.

Our second chart breaks down the relative importance of India's various subsidy programs. Only petroleum and interest subsidies have fallen below their pre-pandemic totals (expressed as a percentage of GDP); fertilizer and food price relief remain above 2020 levels. Further measures to streamline subsidies may be introduced in the budget, but they will likely be balanced with welfare considerations for vulnerable households and farmers.

Modi's government has already made its general fiscal roadmap public: it aims to reduce the budget deficit to 4.9% of gross domestic product by the end of the current fiscal year, and then shrink that ratio below 4.5% by fiscal 2025-26. We've tracked this trend in our third chart.

Finally, we look at India's total debt-to-GDP ratio. This increased significantly during the pandemic, from 47.1% in FY2019-20 to 58.5% a year later, and has broadly plateaued since then. As our breakdown shows, it's notable that the government has borrowed more against the National Small Savings Fund (NSSF) recently.

Beyond fiscal 2025-26, the government appears to be shifting its fiscal policy anchor from deficit targets to a debt-to-GDP ratio framework. This suggests a gradual reduction in the debt-to-GDP ratio is likely to be a priority, aligning with Modi's long-term goals of a resilient, stable economy and public finances on a strong footing.

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