Finance minister P Chidambaram is expected to tighten spending in an interim budget on Monday and resist the temptation to announce a populist spending spree in a bid to stave off defeat at the Lok Sabha elections.
Chidambaram is expected to focus on fiscal consolidation in his budget
speech to the Parliament, his final one before the general elections vote due by May.
"There is no room for populism. He will have to stay focused on the current account deficit, fiscal deficit and inflation," said Vivek Rajpal, an interest rates strategist at Nomura Singapore Limited.
The government aims to limit the size of its fiscal deficit to 4.8% of gross domestic product for the current financial year, at a time when economic growth is at decade lows.
It hopes to make good on its aim thanks to higher-than-expected non-tax revenues such as those from the recent auction of mobile phone spectrum licences, for which companies bid around $10 billion.
Arun Singh, senior economist with research firm Dun & Bradstreet, said international credit agencies would be looking closely at the state of India's public finances.
"When they have already warned of an adverse impact on India's rating if this (deficit) figure worsens, the government really has no choice but to keep walking on a fiscal consolidation path," Singh said.
Prime Minister Manmohan Singh's administration has been widely criticised for its inability to stem corruption, boost growth and control inflation, leading voters to deliver a string of defeats in recent state elections.
In December, global ratings agency Fitch voiced concern that "a steeper political struggle to pull in more votes" might prompt the government to unleash a voter-pleasing spending spree before the polls due by May.
However, the finance minister has dismissed talk of pre-poll giveaways and termed the fiscal gap target for 2013-14 as a 'red line'.
Many economists, therefore, expect Chidambaram to announce an even lower fiscal deficit goal for the next financial year of around 4.2% to 4.3% of GDP, taking it closer to 3% by 2016-17.
In last year's February budget, the government hiked spending in education, health, agriculture and rural development, even though this did little to bring economic growth back on track.
With its term nearly over, economists say it is unlikely the government can do anything dramatic to reignite the growth engine while balancing inflationary pressures -- something the Reserve Bank of India has made a top priority, with three interest rate hikes since September.
India's economy grew by only 4.5% last year, far down from the near double-digit growth enjoyed in the past decade, and little improvement is expected this year.
While cutting expenditure to lower the fiscal deficit is a standard procedure worldwide, rolling back the government's presence can also hurt growth in a country with widespread poverty and scant infrastructure.
"Development spending is bearing the brunt of any cuts," wrote Anubhuti Sahay, senior economist with Standard Chartered Bank, in a note last week.
"The government's dependence on selling assets and channelling funds from one arm of the government to another calls into question the long-term sustainability of fiscal consolidation."
© Copyright © 2013 HT Media Limited. All Rights Reserved.