Budget Deficit Reduction in India: A Path to Sustainable Growth
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Budget deficit reduction is mindful of growth
The Union budget this year set what has been described by some as an "unambitious" target for deficit reduction, taking the targeted deficit to 5.9% of GDP down from 6.4% in the fiscal year ending March 2023.
It might be fairer to describe this budget as one aimed at growth, containing a lot of capital expenditure measures aimed at bolstering India’s infrastructure, with an assumed goal of “crowding in” private business expenditure. In that respect, judging by the run of GDP so far this year, it seems to be succeeding.
India’s sovereign credit rating of BBB- puts it precariously at the edge of investment grade and leaves the bond market vulnerable to downgrade risk. Those fears seem to have been allayed with the recent announcement of global bond index inclusion for Indian government bonds.
India's deficit - on track so far
So far as India’s progress in gradually reducing the deficit and its debt-to-GDP ratio, things seem to be roughly on track this year, and maybe a little ahead of the game.
In order to hit the 5.9% deficit ratio, and assuming real GDP growth of around 7% and inflation averaging about 4%, India’s cumulative deficit needs to come in at about INR 16.9tr by March next year. So far, the monthly deficit figures have kept close to the projected “on target” track required to achieve this, and there seems little danger of any credit downgrades on this basis, with the debt-to-GDP ratio still high but likely to moderate to about 81.5% by the end of this fiscal year, down from 83.8% last year.
External balance and the INR
One of the surprises of the year so far has been the resilience of the rupee. Since October 2022, the INR has inhabited a very narrow range against the USD, between about 80.5 and 83.0. Over recent months, the range has been narrowing, centred on 82.5. To put this into perspective, this makes the INR the third best-performing currency in the APAC region year-to-date and represents a substantial outperformance relative to other APAC FX peers, where, for example, the Japanese yen is 11% weaker, and the Chinese yuan 5.84% weaker against the USD.
Policy rate spreads over USD and FX performance
