Will India lean towards infrastructure or subsidies?

The budget will show the PM’s resolve about overhauling the economy and sustaining a recovery

It is budget season in India, and going by the billboards that have popped up in Mumbai, you’d think it’s election night. The event comes with its share of rituals, from the finance minister’s speech to parliament to the semolina-based dessert he shares with bureaucrats, who get locked in for days to avoid leaks.

Investors’ expectations for Prime Minister Narendra Modi’s first full-year budget today are “sky high,” according to HSBC economists. It will show whether he is serious about overhauling the economy and sustaining a recovery, with growth poised to overtake China’s. Achieving that while reducing the budget deficit, as the government has pledged to do, comes down to one mantra: spend better.

Two lines in the budget will help tell the story: how much the government plans to spend on roads, bridges and power plants, and how much is earmarked for subsidies, a category that tends to swallow a large chunk of available funds.

Infrastructure spending comes under capital expenditure, which has, in recent years, remained below the amount spent on subsidies for food, fuel and fertilisers. Will this government reverse the trend? Nomura analysts expect capital expenditure as a share of the Indian economy to climb to 2.5 per cent from 1.8 per cent in the next fiscal year from April 1, a move they say can be financed by “pruning subsidies, increased asset sales and through other off-balance sheet channels.”

Switching about 0.6 per cent of gross domestic product from current expenditure to capital expenditure can add 60 basis points to growth over three years, according to HSBC.

While getting rid of subsidies altogether is not on the agenda in a nation where 59 per cent of the population lives on less than $2 (Dh7) a day, governments have tried to reduce the corruption that has plagued some of these programmes. Modi is seeking to accelerate the use of biometric cards and expand direct cash transfers. If successful, they could have a big impact.