RaboResearch - Economic Research

India’s fiscal path remains slippery after Modi's BJP win

Economic Report


Co-author: Nishanth Nandakumar

  • On May 23rd, the Election Commission of India (ECI) announced that the Bharatiya Janata Party (BJP) led by Prime Minister Narendra Modi won the general elections in India.
  • India’s consistent budget deficits are expected to continue over the coming years under a BJP-led government in the second term. 
  • Fiscal consolidation is needed to lower elevated debt levels as India’s weak fiscal positon is a major macroeconomic challenge.

Ongoing fiscal woes

Figure 1: Fiscal deficit target in FY2019/20 will be breached
Figure 1: Fiscal deficit target in FY2019/20 will be breachedSource: Macrobond, FRBM, Rabobank

On May 23rd, the Election Commission of India (ECI) announced that the Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, won the general elections in India. This means that the government is likely to stick to the implementation of the new policy measures announced at the beginning of this year in the interim Budget. The new plans require an increase in government funding, but the importance of fiscal consolidation to reduce India’s large debt burden limits the fiscal space of the government. On the other hand, the structure of the government debt, including the long maturity and the fact that it is mainly financed domestically, as well as the favourable debt dynamics make the debt path sustainable over the coming 5 years.

The fiscal deficit is expected to widen slightly

Policy measures announced in the interim Budget in February point towards a continuation of fiscal slippage by the government. Last year the government already revised the fiscal deficit downward from an initially projected 3.3% to 3.4% of GDP. For fiscal 2019/20, the government estimates the fiscal deficit to reach 3.4% again, thereby breaching the target of 3.1% set by the Fiscal Responsibility and Budget Management (FRBM) committee (Figure 1), needed to achieve the prudent medium-term general government debt ceiling of 60% of GDP by FY 2023.


The main drivers of the widening deficit are related to an announced increase in spending as well as ongoing challenges for revenue collection. The farm-relief package[1] announced in the interim Budget is expected to cost the government about INR 750bn (USD 10.7bn) over the coming fiscal year, accounting for about 0.4% of GDP. In addition, the interim budget includes a modest increase in infrastructure spending, as the government announced to increase the outlay for highways, railways and rural roads by approximately 12% compared to last year. The total increase is mainly driven by the development of rural roads and will help to tackle infrastructure constraints, which hampered growth in the past. Moreover, these public investments will help to support future private investments, thereby supporting further economic development. In total, the government plans a capital investment of about INR 100,000bn up to 2024.

Figure 2: Interim Budget expenditure composition
Figure 2: Interim Budget expenditure compositionSource: Ministry of Finance, Rabobank
Figure 3: Interim Budget revenue composition
Figure 3: Interim Budget revenue compositionSource: Ministry of Finance, Rabobank

The largest part of total government expenditures consists of interest payments (Figure 2), accounting for approximately 24% of total expenditures, followed by defence spending and subsidies (for example for fertilizers, food and petroleum). The increase in expenditures compared to the previous year is mainly driven by higher oil prices resulting in a significant increase in petroleum subsidies, agricultural spending through the farmer support program and transfers to the Goods and Services Tax (GST) compensation fund. In addition, transfers of the central government to the states are expected to increase significantly, as the central government committed to an annual revenue growth of 14% for the states over 5 years. The share of the states in the aggregate budget deficit and debt levels is substantial, which underlines the importance of maintaining fiscal discipline and macro-fiscal capacity at the state level.


On the revenue side, GST implementation issues weigh significantly on indirect tax collections, leading to tax revenue short-falls in fiscal 2018 (eventually 13.4% lower than initially budgeted), which we expect to continue over the coming fiscal year (Figure 3). At the beginning of 2019, the GST Council announced a doubling of the income tax exemption threshold for small companies and increased the turnover limits under the concessionary GST composition scheme. These adjustments add to several other GST rate cuts since its implementation in July 2017 and reduce the tax base. This limits the revenue collection capacity of the government and is expected to lead to revisions of tax revenue collection under the current estimated Budget. Moreover, the middle-class tax cut announced in the interim Budget is expected to lead to a fiscal stimulus of about 0.1% of GDP which will, together with the sales tax cut announced in December 2018, further constrain government revenues.

Questionable commitment

During the presentation of the interim Budget, Minister Goyal explicitly stated the government’s commitment to fiscal consolidation, thereby stressing its focus to reach the 40% central government debt target by fiscal 2023 from about 49% in fiscal 2018, consistent with the FRBM recommendations. This commitment will help the government in its mission to improve India’s business environment and to attract foreign investment.

However, given the recent developments and the consistent breaches of the FRBM fiscal deficit targets over the past years (see Figure 1), we consider it unlikely that the government will reach the 40% target in fiscal 2023. Moreover, we expect the central government deficit to widen somewhat over the coming fiscal year 2019/20 and arrive at 3.6% of GDP, slightly higher than the budgeted 3.4%. The deviation is based on the underlying nominal growth assumption of 11.5% by the government which we believe is slightly too optimistic. In addition, we need to keep in mind that some questionable accounting methods are being used as actual public sector borrowing seems to be higher than what the current deficit figures would imply. This suggests that government activities could be done off-balance sheet through private sector entities. Moreover, taking into account non-payment of overdue payments to the Food Corporation of India bills would also increase the deficit numbers.

On the other hand, India’s commitment to reduce the deficit significantly over the coming years through reform implementations focusing on simplifying the tax system, enhancing GST compliance and reducing tax evasion is expected to narrow the fiscal deficit over the medium term. This supports India’s debt sustainability as the fiscal position and high government debt levels remain key macroeconomic challenges for the country. Lower government debt reduces the large interest burden, improves investor sentiment and reduces yields, thereby supporting private investment and medium-term growth.


We believe the new government’s plans will not help India to reduce its fiscal deficit. Instead, we believe that the deficit will even widen a little, from a budgeted 3.4% of GDP in fiscal year 2019/2020 to 3.6% of GDP. The budget has already been revised upward (from 3.3% of GDP) and we believe that increased spending (for example related to the government’s farm-relief package and infrastructure spending) as well as challenges for revenue collection (related to GST implementation issues) make further fiscal slippage likely. This also means that the government will not likely reach its target of reducing the central government debt to 40% of GDP in 2023. In addition, India’s public finances remain sensitive to changes in nominal GDP growth which could result in a slower fiscal consolidation when major threats to the world economy, such as a US recession and an increasing probability of a US-China trade war, materialize.

[1] The package includes a direct cash transfer scheme of INR 6000 (about USD 86) for small farmers, paid in three equal instalments.

Sophie Borra
RaboResearch Global Economics & Markets Rabobank KEO
Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO

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