India’s Prime Minister Narendra Modi is navigating a delicate fiscal balancing act in his coalition government’s inaugural budget. Two crucial allies, collectively holding 9.5% of parliamentary seats, have laid out substantial financial demands exceeding $15 billion for their respective states.
Despite these pressures, Modi appears poised to manage these demands within the current budgetary constraints, buoyed by substantial transfers from the central bank and robust tax revenues. Economists surveyed anticipate the government will either maintain its fiscal deficit target of 5.1% of GDP for the fiscal year ending March 2025 or achieve a marginal reduction.
The coalition allies, N Chandrababu Naidu of the Telugu Desam Party (TDP) and Nitish Kumar of the Janata Dal (United) (JDU), have refrained from contesting key cabinet positions, instead leveraging their influence to secure funding for their states—Andhra Pradesh and Bihar, respectively.
Naidu’s TDP seeks over $12 billion primarily for Andhra Pradesh, earmarked for projects like Amaravati’s new capital and long-delayed irrigation initiatives. Kumar’s JDU aims for $3.6 billion to bolster developmental projects in Bihar ahead of crucial elections.
Milan Vaishnav of the Carnegie Endowment for International Peace describes these budget negotiations as typical in coalition governments, emphasizing the importance of the “modalities of transfers.”
The fiscal landscape poses challenges beyond the immediate term, warns Shumita Sharma Deveshwar of GlobalData.TS Lombard, noting potential risks of escalating demands from other states and voter perceptions of favoritism.
India’s credit ratings, currently at the lowest investment grade level, hinge on its ability to curb deficits and manage debt. S&P Global Ratings has hinted at a possible upgrade pending fiscal improvements.
Finance Minister Nirmala Sitharaman aims to reduce the budget deficit to 4.5% of GDP by March 2026, underscoring long-term fiscal discipline amid coalition dynamics that could influence the pace of consolidation.
As Modi’s government prepares for upcoming state elections, economists and investors await Sitharaman’s budget address on July 23 for insights into spending priorities amidst populist pressures and fiscal prudence.
Despite potential challenges, analysts like Garima Kapoor from Elara Securities foresee the government meeting its deficit targets this year while accommodating some allied demands, reflecting a cautious optimism amidst fiscal complexities.
