📰The Problem with India’s Rising Fiscal Deficit | Daily India Briefing

India’s growth looks unbeatable on paper. But, Modi’s next budget may decide whether it’s built to last or quietly running out of fuel. Today, we explain more.

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Macro

• The UAE wants to double bilateral trade to $200 billion (₹18.1 trillion) and develop a special investment hub in western India by 2032. A mega partnership in the Dholera region would involve a city and airport. The UAE also inked a $3 billion (₹271.2 billion) LNG deal with India starting in 2028 until 2038. 

• De Beers cut diamond pricing for the first time since 2024 amid US tariffs on India. India is the largest exporter of diamonds in the world.  

Equities

• HDFC's net income rose 11 percent y-o-y to $2.1 billion. (₹186.6 billion) last quarter. The loan book rose by 12 percent helped by growth in retail and small and mid-market enterprises loans. Management reiterated that it is focused on raising deposits to strengthen its balance sheet after its merger with parent company, HDFC ltd. in 2023.  

• Axis Bank CEO Chaudhry says India needs 8-10 large banks to facilitate growth. India has 12 state-run banks and 21 large and mid-sized banks but only 5 lenders can offer services across the financial ecosystem. Axis (as one of the 5) has $184 billion (₹16.8 trillion) in assets across 5,976 Indian locations. 

• Brookfield-backed Clean Max Enviro cut its IPO size down to $400 million (₹36.2 billion) from $573 million (₹51.8 billion). The clean energy industry in India is plagued with companies trading below their offer price. 

• Reliance earnings fell short of expectations, weighed especially down by retail spending. The retail business alone is worth $103 billion (₹9.3 trillion) at nearly half of Reliance’s market cap. More positive news is that Reliance’s e-commerce unit grew 53 percent y-o-y becoming India’s 2nd largest player. 

Alts

• Jane Street India had 494 percent trading profit growth before being banned, reaching $517 million (₹47 billion). Jane Street is still working on filing an affidavit against SEBI to be able to trade in the country again. 

• Multi-asset investors remain bullish in India. Franklin Templeton says that investors being bearish on India will miss on gains in the long-run; a lack of pure-play AI opportunities clouds more opportunity in equities and real estate.

Policy

• The highlight of India's January RBI bulletin is comfortable FX reserves and growing domestic demand. While urban demand is still slowly growing after being cut due to COVID, rural demand has skyrocketed. Additionally, a stable FX reserves number and current account deficit are strong areas for India to remain in. 

• Andhra Pradesh is considering a social media ban depending on age group like Australia’s U16 law. While India has parental controls for children accessing social media, there are no federal restrictions for youngsters. Petitions have been rising to enforce such limitations though there are some legal and technological hurdles.  

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The Problem with India’s Rising Fiscal Deficit

India’s economy, on paper, looks like the world’s strongest right now with 7.4 percent growth for the fiscal year ending in March and a population that is ready to work. Despite that, Modi will likely face a spending bill issue that could determine whether India’s growth remains durable until 2047 or if India will take longer to become fully developed. 

Since taking office in 2014, Modi’s economic strategy has rested on two pillars: fiscal restraint and aggressive public investment in infrastructure. For much of the past decade, he has managed to pursue both. That balancing act is now breaking down. Government capital spending as a share of GDP has doubled since 2014, making the state the primary engine of investment. At the same time, public debt has surged, with the debt to GDP ratio climbing to about 81 percent from the low 60s when Modi first came to power.

On the surface, the macro picture appears comfortable. Inflation is low, the trade deficit is manageable, and corporate balance sheets are relatively healthy. But beneath that ‘Goldilocks Zone’ veneer sits a more troubling reality: private investment remains stubbornly weak. Capital is scarce and expensive, in part because the government absorbs so much of it. Higher borrowing by the state pushes up interest rates and dampens incentives for entrepreneurs to invest, forcing New Delhi to spend even more to keep growth afloat.

Modi has long argued that infrastructure spending would crowd in private capital. New highways, ports and railways were meant to unlock animal spirits. Instead, they have entrenched a growth model heavily dependent on public expenditure, particularly in sectors such as steel and cement that now rely on government orders. With fiscal deficits still near 5 percent, the room to keep spending aggressively is narrowing. The issue, of course, is that nobody will build larger projects and cut bigger ribbons like the recent Navi Mumbai Airport when fiscal spending decreases.

The upcoming budget will now force a reckoning. Modi can maintain the capital expenditure push and risk missing fiscal consolidation targets, or he can begin tightening the purse strings and accept slower growth in the near term. Politically, big projects are far more attractive than balance sheet repair. Economically, however, reducing the state’s claim on scarce capital may be the only way to revive private investment and secure India’s long term growth.

See you tomorrow.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

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