By Kimberley Kao and Fabiana Negrin Ochoa

India's government presents its budget on Saturday against a tough backdrop: growth is slowing, the rupee is weak and external uncertainty is on the rise. Economists expect the budget for the fiscal year ending in March 2026 to walk a narrow path between continuing fiscal consolidation and shoring up the economy. Whether it pulls that balancing act off remains to be seen.

FISCAL DISCIPLINE: With advance data signaling that India's economic growth hit a four-year low for the financial year ending this March, the pressure is on for policymakers to buoy confidence. But analysts don't expect that to come at the expense of fiscal consolidation.

Consensus views are for India to cut its fiscal deficit target further to about 4.4% to 4.6% of gross domestic product from 4.9% the prior year. It's also expected to hit or overdeliver on its target for fiscal 2025.

That suggests space to ramp up spending but the government is still likely to stick to its medium-term target of getting the deficit down to 4% of GDP.

Hopes for a big fiscal package to get the economy out of its soft patch are likely to be disappointed, Shilan Shah, deputy chief emerging markets economist at Capital Economics, said in a note.

The finance ministry will want to show its commitment to keeping a lid on India's already sizable public debt, Shah said. Continued public support for the ruling party also suggests a reduced need for "big giveaways," he added.

TAXES: Economists expect measures to stimulate economic momentum to be targeted, adhering to fiscal consolidation goals. Income tax cuts, changes to tax exemptions, and corporate incentives are all in the potential pipeline.

Tax relief is at the top of the wish list of measures to boost consumption--a list that has been growing as demand slows, said Radhika Rao, senior economist at DBS in a note.

Lowering indirect tax rates that affect larger parts of the population, alongside cuts to fuel and cooking gas prices and measures to tame food prices, might be the best options to boost spending, DBS's Rao said in a note.

Economists at Barclays expect a continued rationalization of the direct tax code and simplification of the tax regime to benefit more taxpayers. Amid the trade uncertainty generated by President Trump's return, they expects multiple tweaks to India's customs duty structure. "Customs duty announcements will be pivotal to understanding the government's response to tariffs under Trump 2.0."

Nomura economists see scope for measures that further the "Make in India" push. This could include preferential tax rates to get firms to manufacture in India and higher import duties on products to counter China dumping.

SOCIAL ISSUES: Discontent over rising living costs and dimming job prospects mean the budget might also include measures to strengthen the social safety net.

Policies aimed at tackling unemployment and supporting gig workers will be key to watch, along with a potential hike to the minimum wage, Citi Research analysts said in a note. Better social security for workers could also be on the cards.

DBS's Rao anticipates a continued emphasis on support for lower-income groups, women, farmers and the youth, with employment programs focused on upskilling workers to boost wages.

IMPLICATIONS: If the budget plays out as economists expect, it will have implications for the central bank and the stock market. Without a big fiscal impulse, monetary policy will have to do more of the heavy lifting to rekindle economic growth.

A commitment to fiscal consolidation is likely enough for the Reserve Bank of India to lower its policy rate by 25 basis points at its Feb. 7 meeting, OCBC economist Lavanya Venkateswaran said.

A positive read of the budget would likely give stock markets a much-needed lift as India's economic slowdown and external uncertainty weigh.

Ankita Pathak, chief macro and global strategist at Ionic Wealth, thinks markets will try to rule out any bad news in the budget.

"No news is likely to be good news," she said in a note. "There could be some positives for housing, capital-intensive sectors and consumption but gross budgetary support must be meaningful."

Eyes will be on the fiscal deficit reduction, she added, highlighting policy continuity and credibility as key deliverables.

Write to Kimberley Kao at kimberley.kao@wsj.com and Fabiana Negrin Ochoa fabiana.negrinochoa@wsj.com

(END) Dow Jones Newswires

January 30, 2025 03:35 ET (08:35 GMT)

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