NEW DELHI: India plans to increase infrastructure spending in its annual budget next week to bolster the economy, but budget constraints leave little chance of concessions for pandemic-hit households, officials said.

Asia’s third-largest economy is expected to grow 9.2% in the fiscal year ending in March, following a 7.3% contraction in the previous fiscal year.

Yet private consumption, which accounts for almost 55% of GDP, is below pre-pandemic levels amid rising household debt, while retail prices have risen by almost a tenth since the beginning of the coronavirus outbreak in early 2020.

The Feb. 1 budget comes days before elections start in five states, including the most populous Uttar Pradesh, which could prompt Finance Minister Nirmala Sitharaman to promise increased rural spending and food subsidies and fertilizers.

Yet these are expected to be eclipsed by spending on bolstering transport and health networks, which analysts say could rise between 12% and 25% in the next fiscal year.

“We will focus on reviving the economy through higher investment, while personal and business taxes will remain stable,” an official, who spoke on condition of anonymity, told Reuters, adding that the relaunch of growth would be a priority.

To attract investments that create jobs and spur growth, Sitharaman could also strengthen production-related incentives in more industries.

“Continuing on its investment push, we expect a further 25% increase in central government capital expenditure…we expect budgetary allocations for roads, highways and railways to increase,” said Nomura analyst Sonal Varma in a note.

Food processing and exports are two areas that could see more production-related incentives, Varma added.

Two senior government officials said no major fiscal changes were likely on personal and corporate taxes, given rising public debt and weak private investment.

After the government cut corporate taxes in 2019 to some of the lowest in Asian countries, further tax breaks for the industry are unlikely, officials said.

“We have one of the lowest taxes for businesses,” one added. “More tax cuts are not possible at the moment.”

Businesspeople and economists are worried about growing risks of inflationary pressure, amid rising global crude prices and the next wave of COVID-19 infections that experts say could threaten over the course of the next eight to 10 weeks.

RISK OF RISING RATES

The economy also faces the risk of higher interest rates, even before a recovery in consumer and business spending, as the US central bank forecasts rate hikes.

As the Indian government ramps up spending, it will make sure to stick to its longer-term goal of fiscal consolidation, officials said.

The budget is expected to reduce the federal budget deficit to 6.3% to 6.4% in 2022/23 from 6.8% in 2021/22, government officials and economists said.

This could lead to gross market borrowing of around 13 trillion rupees ($174 billion) from around 12.1 trillion this year, analysts said.

Previous governments have used the budget to announce major economic reforms, but economists said major measures looked unlikely next week due to political pressure.

Prime Minister Narendra Modi was recently forced to scale back his efforts to deregulate agriculture after a year of protest by farmers.

The government is also unlikely to set ambitious privatization targets after three years of missing its targets, not only because of the pandemic, but also because of administrative hurdles.

India wants to raise 1.75 trillion rupees ($23 billion) through the sale of stakes in state-owned companies, but could not complete the promised sale of refiner Bharat Petroleum Corp. Ltd, of two banks and insurance companies, among others planned last year.

The government has raised less than 100 billion rupees from the divestment, but is likely to list insurance giant LIC before the end of the financial year, which could raise up to $12 billion.

“The strategy adopted in the last budget to reduce the public debt-to-GDP ratio…should continue,” said economist NR Bhanumurthy of BR Ambedkar School of Economics in the southern city of Bangalore.

This would follow the earlier path of focusing on capital spending and enterprise privatization, he added.

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