As India's economy continues to reel in the aftermath of last year's demonetization drive, Finance Minister Arun Jaitley must balance between the need for stimulating growth and continuing fiscal discipline when he presents the 2017-2018 budget on Wednesday.
India's fiscal year starts April 1, and the outlook has certainly changed from last year. Entering 2016 as the world's fastest-growing economy with annual gross domestic product (GDP) growth of 7.6 percent, the South Asian giant now faces shrinking factory output, consumption and rural demand following Prime Minister Narendra Modi's contentious currency reform that launched in November. The cash shortage that ensued could see India enter four consecutive quarters of sub-7 percent growth, Societe Generale estimated.
This year's budget also boasts structural changes. Starting from this fiscal year, the railway budget will now be merged with the government's annual financial blueprint, ending a decades-old practice of presenting them separately. Meanwhile, the budget date has also been brought forward by one month to help ministries better allocate their spending.
"Against the economic backdrop and upcoming state elections, the key debate is whether the government will tilt towards activating fiscal easing to revive domestic demand and take a more populist stance in the budget and initiate transfers to households," explained Morgan Stanley economists in a recent report.
But with government debt running well above fellow Asian emerging markets, New Delhi has limited fiscal space for populist measures. For 2016, India's public debt is seen at 66 percent of GDP, versus China's 38 percent, Malaysia's 55 percent and Thailand's 43 percent, according to the International Monetary Fund.
"Despite the negative impact on short-term growth from demonetization, fiscal discipline will remain a priority," said Radhika Rao, economist at DBS. "Signs of a populist budget will be positive for markets but if accompanied by a larger-than-expected borrowing program, sentiments will quickly reverse."
Still, Jaitley's hands aren't completely tied; Wednesday's budget is expected to have growth-friendly measures in five key areas.