The government may announce more "expenditure initiatives" in the run-up to the national elections in the first half of 2024, S&P Global Ratings has said, although they may not have a major impact on public finances.
"Certainly, more expenditure initiatives are possible as we move through this election cycle," Andrew Wood, S&P's director for sovereign ratings, said on November 8.
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"In the very near term, these could be supportive of consumption as we tend to see around these periods of time. But it is unlikely that…. They are going to have a major impact on medium-term finances," he said.
Wood's comments came after Prime Minister Narendra Modi announced on November 4 that the government will continue to provide foodgrains for free to more than 80 crore poor Indians until December 2028. The scheme, which made previously subsidised foodgrains free under the National Food Security Act, was announced for one year in late 2022 and replaced a broader, pandemic-era scheme that had sent the Centre's food subsidy bill soaring.
Wood expects the Indian government to stick "pretty closely" to its fiscal deficit targets and the consolidation roadmap even after accounting for the five-year extension to the free foodgrains scheme, that would cost, he estimates, about 0.7 percent of the GDP.
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The government is looking to lower its fiscal deficit to 5.9 percent of GDP in 2023-24 from 6.4 percent last year, with a medium-term target of bringing it below 4.5 percent by 2025-26. According to Wood, the additional expenditure needed to provide foodgrains for an additional five years can be balanced by adjustment to spending under different heads. At the same time, revenue growth is seen remaining supportive over the next few years.
"The targets that the Centre has set for itself are very gradual in terms of the pace of consolidation. So, there is some room to maneuver within that glidepath as long as the economy stays pretty strong," Wood said.
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S&P, which has a 'BBB-' rating on India with a stable outlook, expects the Indian economy to grow by 6 percent in 2023-24, with the GDP growth rate jumping to 6.9 percent in the next two years. The government and the Reserve Bank of India have forecast 6.5 percent as the growth rate for the current year.
Wood said S&P's expectation of 6-7 percent growth over the next few years anchors its assessment that India's trend growth rate will remain well above that of its emerging market peers. What this also reflects is "meaningful productivity growth" in the Indian economy.
"It is noteworthy that India is able to achieve this kind of performance amid the difficult landscape in the global economy right now," he said, adding that India's growth story is an "integral support for its sovereign rating".
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The sovereign analyst noted that India's general government fiscal deficit – the Centre's, combined with states' – is high and is expected to remain above 7 percent of the GDP for the next three years and that "these fiscal metrics might be tough to sustain without healthy economic growth". However, S&P has no concerns as such at the moment.
"Without consistently strong economic growth dynamics, we might have concerns regarding the sustainability of the government's fiscal and debt position that could be a more negative factor for the ratings. But currently we don't see a case for that," Wood said.
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