India's Economy: Shimmering Growth Hides Fiscal Danger

India's economy is projected for a robust 7.4% growth in the current financial year ending March. Despite this impressive figure, Prime Minister Narendra Modi faces a significant decision regarding the nation's economic policy direction. For over a decade, his administration has balanced fiscal restraint with substantial infrastructure investment. However, current economic conditions suggest this dual approach may no longer be sustainable.

The economy exhibits a "Goldilocks phase" with low inflation and manageable deficits, yet private investment remains surprisingly subdued. This has led to a structural shift where the public sector, specifically federal government capital spending, has doubled its share of GDP since 2014. Consequently, India's debt-to-GDP ratio has surged to 81%, a sharp increase from when the current government took office. This situation has resulted in higher interest rates and discouraged entrepreneurial activity, creating a self-reinforcing cycle of capital scarcity.

As the government prepares its next budget, Modi must choose between continuing ambitious infrastructure projects or tightening fiscal belts. Prioritizing capital expenditure risks missing fiscal consolidation targets, while trimming projects could slow medium-term growth in sectors reliant on government contracts. The political appeal of visible infrastructure projects clashes with the less photogenic but potentially more beneficial goal of fiscal discipline. Ultimately, to foster sustainable future growth, India needs to reduce its reliance on government borrowing and encourage private investment.