In India's budget plan, Modi has one eye trained on his 2024 re-election

A full 14 months before the next general election in India, prime minister Narendra Modi’s government is striving to grow the economy, bring down its deficit, and enchant voters with tax sweeteners—all at the same time.

In the last full budget before the election, Nirmala Sitharaman, India’s finance minister, tabled her annual budget in parliament today (Feb. 1). The document detailed the government’s fiscal plans for the coming year—including not just heavy capital expenditure but also measures targeted at farmers, the salaried middle class, women, and senior citizens.

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This is the Modi government’s 11th budget since 2014, and so far, his finance ministers have not shied away from announcing measures that strain the fiscal purse—whether in or out of an election year. Nine Indian states will hold local polls this year, followed by Modi’s bid for a third term in power next year. This year’s budget, therefore, holds many familiar kinds of sops—but it aims to shrink the fiscal deficit at the same time.

“The wriggle room for fiscal adventurism was always limited, so it is a matter of macroeconomic relief that the government has continued to opt for fiscal consolidation, while ramping up public capex, and still playing to the electorate gallery, particularly the middle class,” Aurodeep Nandi, a Nomura economist, wrote in a note.

Farming the vote

Farmers are particularly important to Modi’s political base. Estimates of the number of farmers in India range from 90 million to 150 million, since the sector is largely unorganized. Nearly half of India’s workforce is engaged in agriculture.

In its budget, the government raised the share of bank credit to farmers without a collateral to $244.5 billion for 2023-24, up 11% from last year’s allocation, with a focus on animal husbandry, dairy and fisheries. The budget also apportions $1.2 billion to set up 500 biogas plants for better management of cattle and organic waste. The finance minister also announced an agricultural accelerator fund to support startups in rural farming areas.

Reaching the last mile

Another stated priority for this year’s budget is to improve the lives of particularly vulnerable tribal groups. Sitharaman earmarked a corpus of Rs15,000 crores ($1.8 billion), over three years, to deliver safe housing, clean drinking water and sanitation, education, and health and nutrition to such groups—roughly five times last year’s allocation.

This matters particularly to the electoral prospects of Modi’s Bharatiya Janata Party (BJP) in India’s eastern and northeastern states. Of the nine states that will hold elections this year, Meghalaya, Mizoram, and Nagaland are home to populations where 85% of people belong to a “tribal group” classification. According to the 2011 census, India’s tribal groups constitutes about 8.9% of the total population, forming a large voter base.

Relief for India’s middle class

Sitharaman announced that no income taxes would be levied on annual income of up to Rs7 lakh, as part of a relatively new, three-year-old tax regime. This regime, still optional, offers no exemptions for insurance and investments, unlike an older tax regime, where the no-tax ceiling stood at Rs5 lakh. The government also slashed the highest applicable tax rate from 42.7% to 39%, and eased taxes on slabs of income above Rs7 lakh.

“Increasing tax rebates can be viewed as an effort to nudge people to move to the new tax regime,” Sakshi Gupta, an economist at HDFC Bank, told Quartz. “This will also provide a consumption boost and increase in overall savings, especially when there’s little that can be done for external demand [overseas demand].” For Indians perched on the lower rungs of the income ladder, Gupta said, the new tax measures were a gift. And that segment of the population is vast. According to government data released in 2020, 73% of tax-filing Indians earn less than Rs5 lakh a year.

Frequencies of words in the 2023 budget speech

1: “Coal,” as part of a list of sectors in which 100 critical infrastructure projects have been identified as ripe for investment

23: “Green,” mostly in a section titled “Green growth”

13: “Amrit,” the Sanskrit word for “nectar,” and the Modi government’s word of choice to describe the “blissful” years of its reign

3: “Atmanirbhar,” or “self-reliance,” a Modi government campaign to promote domestic production and cut back imports

3: “Employment,” in addition to two mentions of “jobs”

4: “Millet,” the indigenous grain promoted by the Modi government, which declared 2023 the “International Year of Millets”

By the digits

$167.3 billion: India’s projected capital expenditure for 2023-24, roughly 4.5% of GDP

5.9%: The government’s fiscal deficit target for 2023-24, with a view to bringing it below the 5%-mark by 2025-26

$4.28 billion: Loss of revenue for the government by raising limits on income tax exemption

6.5%: Indian economic growth projection for 2023-24, compared to 7% in the current financial year

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