Modi Faces Budget Pressure as Second Ally Seeks $3.6 Billion Aid

(Bloomberg) -- Prime Minister Narendra Modi’s second-biggest ally is demanding 300 billion rupees ($3.6 billion) from India’s federal budget this year to help fund projects in Bihar state, according to people familiar with the matter, a test for the coalition government.

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The Bihar government, which is led by Janata Dal (United)’s Nitish Kumar, made the request during a pre-budget meeting with Finance Minister Nirmala Sitharaman last month, the people said, asking not to be identified because the discussions are private.

The government has received the request from Bihar but hasn’t yet decided how much will be allocated to the state this year, one of the people said.

Modi’s biggest ally in the coalition — N Chandrababu Naidu of the Telugu Desam Party — has already made a request for more than $12 billion in aid over the next few years for Andhra Pradesh state, Bloomberg News reported last week.

The combined fiscal demands from the two coalition parties are equivalent to more than half of the government’s annual food subsidy budget of 2.2 trillion rupees. That shows the fiscal pressure Modi is under as he balances the demands of his allies with his goals of curbing government debt. He has some leeway in this year’s budget though, after the central bank paid the government a record dividend and tax revenues surged.

Modi’s Bharatiya Janata Party failed to win an outright majority for the first time in a decade in recently held elections and is reliant on support from its allies to continue governing. The two coalition partners make up 9.5% of the parliamentary seats held by Modi’s National Democratic Alliance.

Both the BJP’s allies want the federal government to allow them to borrow more in the states that they govern. Fiscal rules stipulate that states limit their borrowing to 3% of the region’s gross domestic product. Bihar has asked for an additional 1% of headroom with no conditions attached, people familiar say, while Andhra Pradesh has requested 0.5%.

The JDU also wants for Bihar:

  • Provision in the current budget for building nine airports, four new metro lines and seven medical colleges in the state

  • Funding for setting up a 200 billion-rupees thermal power plant

  • Repair work across over 20,000 kilometers of roads

  • Bihar has requested special category status, according to local media reports, which would give the state preferential treatment in accessing funds from the central government and receiving tax breaks

A spokesperson for India’s Ministry of Finance didn’t immediately respond to a request for further information. JDU leaders weren’t immediately available to comment.

The government is due to release its budget for the fiscal year through March 2025 on July 23, with Sitharaman pledging to narrow the federal deficit to 5.1% of GDP. Combining the central and provincial budgets, the deficit was estimated at 8.8% in the past fiscal year, according to the International Monetary Fund. S&P Global Ratings said last week that bringing down the combined deficit to below 7% of the GDP could trigger a rating upgrade.

India’s states get the bulk of their income from a share of tax revenue collected by the central government. They are also restricted in their ability to borrow. In Modi’s first term, Bihar received a financial package of 1.25 trillion rupees to pay for farmer welfare and upgrading of roads, railways and airports.

Both Bihar and Andhra Pradesh are facing financial strain, reducing their ability to spend on development projects. Bihar’s spending on salaries, pensions and interest payments makes up more than 40% of the state’s revenue income, according to official data. The north-eastern state is one of the poorest in the country, with per-capita income estimated at about 59,000 rupees in the 2023 fiscal year, less than half the national average.

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