The interim budget for next fiscal will be framed against the backdrop of a resilient Indian economy amid elevated global risks, and the final budget after the battle of the hustings, most likely in July 2024.

In the first half of this fiscal, the economy beat expectations by growing at 7.7%. For the full fiscal, first advance estimates from National Statistical Office (NSO) peg GDP growth of 7.3%. We expect growth to moderate to 6.4% in fiscal 2025 as global slowdown and impact of rate hikes from RBI bite. Even at 6.4% India is likely to remain the fastest growing large economy.

While that is the good part, challenges loom-largely relating to food inflation, which can be worrisome in a poll-bound year.

Geopolitical developments such as the ongoing conflicts in Europe and the Middle East make the environment highly uncertain as well, which can stress commodity and crude prices.

Amid these dynamics, it is important to keep macroeconomic fundamentals strong and stack up on tools that can be used to ease crises. As things stand, there are two priorities for the interim budget: adhering to committed path of fiscal prudence, and taking steps to broad-base pick-up in private investments.

Both are essential for a sustainable lift to economic growth.

While only a vote-on-account, the budget math will indicate fiscal consolidation intent. If the current National Democratic Alliance comes back to power, the interim budget is likely to be retained as the final one, as was done previously.

After winning the general elections in 2014, the NDA retained the fiscal targets set in the interim budget set by the United Progressive Alliance II. Ditto 2019. As for fiscal deficit, the government managed to achieve its target of 6.4% of GDP last fiscal and is likely to achieve the target of 5.9% of GDP this fiscal.

In the forthcoming budget, the government needs to bring down fiscal deficit target further to be on the glide path to 4.5% by FY26. This is important for three reasons: One, fiscal consolidation is crucial as India has highest debt/GDP ratio among similarly rated sovereigns, making it vulnerable on that count.

Two, India’s inclusion in JP Morgan Bond Index subjects it to higher fiscal scrutiny from foreign investors.

And three, fiscal consolidation will support the efforts of Reserve Bank of India to come near its medium-term inflation target of 4%.

Revenue collections have been better than expected thus far and are likely to remain so next year as the growth outlook is healthy and tweaks to the Goods and Services Tax have made tax collections robust. The ruling government increased capital expenditure significantly last fiscal and offered interest-free loans to states to bolster their investment efforts.

This was the right way to strengthen post-covid recovery, improve the growth potential of the economy, and crowd in private investments. Building infrastructure is critical to improve logistics, which is key to the success of the manufacturing sector and to attract global supply chains to India.

In the past two fiscals, government capital expenditure has played an important role in lifting the investment cycle in India and this has spilled over to private investments in sectors such as cement and steel, which feed directly into infrastructure.

But the fiscal space for supporting infrastructure spending through the budget will narrow due to the imperative of fiscal consolidation. Interest payments and subsidies are the stickier parts of expenditure, which are hard to curtail. So, government spending on infrastructure must grow at a slower pace hereon.

This implies it is time for the private sector to pick up the investment baton. The climate for private investments has been improving due to healthy corporate balance sheets, rising capacity utilization in manufacturing, spillover from government spending on infrastructure to cement and steel, and the production-linked incentive scheme. Also, global manufacturing giants are eyeing alternative production sources and supply-chain diversification. India must hitch its wagon to this star opportunity. To broad-base private sector investments, animal spirits need to be unleashed.

Which brings us to the second priority-of improving the environment for private investments to flourish. The budget is not the only opportunity do so, but governments have often used it as a platform for reforms, too. India’s corporate tax rates are competitive, logistics has been showing improvement, and increasing digitalization is helping navigate processes faster and more efficiently.

Now is the time to structurally improve contract enforcement and address land, labour, and regulatory hurdles. While it would be too much to expect the interim budget to spell out a detailed strategy for this, the announcement of some steps and listing them out as priority for the next fiscal would be par for the course.