NEW DELHI, July 18 (Reuters) - Indian Prime Minister Narendra Modi will seek to mend his relationship with voters in the federal budget to be announced next week, economic analysts said, citing possible steps to boost jobs and incomes as growth in the economy remains uneven and food prices continue to surge.
Modi's party fell short of reaching the half-way mark in the general election that concluded last month as jobs and the high cost of living overshadowed his high voltage Hindu nationalist campaign.
To stay in power, Modi is depending on two fickle regional allies, the Telugu Desam Party (TDP) and Janata Dal (United), who control Andhra Pradesh and Bihar states respectively.
Finance Minister Nirmala Sitharaman will table the government's first budget of Modi's third term on July 23, which will provide the first glimpse of any change in the government's economic policies.
Interim budget estimates for the fiscal year 2024/25 that started on April 1 will be replaced by the new budget.
"We think the budget will balance economic imperatives with political ones," said Shreya Sodhani, regional economist at Barclays.
"This would mean the government using the windfall from the RBI dividend and higher tax revenues to fund higher spending, rather than reducing the deficit," Sodhani said, referring to the central bank, the Reserve Bank of India.
A record $25 billion surplus transfer from the central bank will allow the government more room to spend without expanding the deficit. The fiscal deficit target will be retained at 5.1% of gross domestic product, a majority of economists polled by Reuters said.
Over the last three years, the government has nearly doubled spending on long-term infrastructure projects as a way to push growth and generate jobs.
It plans to spend 11 trillion Indian rupees ($131.61 billion) on such projects this year and some economists expect an added push to manufacturing in the budget.
"We expect the government to maintain its focus on promoting domestic manufacturing," Nomura economists said in a note, adding that they expect an increase in local procurement requirements and the extension of a concessional tax rate for new manufacturing facilities.
The government is expected to also bring in consumption boosting measures that were missing in the interim budget presented before the elections.
According to a Reuters report, the budget may lower personal income tax for some categories in the upcoming budget.
"The Indian middle class has been supporting Modi in a very determined way. But for years they have not got much relief," said political analyst Rasheed Kidwai. "The time has come for the government to give some kind of relief to them."
Alongside, the South Asian nation may increase state subsidies on rural housing and food.
PANDORA'S BOX
Putting the government in a fix, the two key allies of the government have demanded $6 billion in funds for their states, which could give way to more such demands from others.
Before the election, many states, including those ruled by the opposition like West Bengal and Kerala, claimed they had not got a fair share of funds from New Delhi. The federal government has contested such claims.
"I think that is opening a Pandora's box," Kidwai said, referring to the demands from the allies.
He said preferential treatment to the allies will lead to a "lot of heartburn".
However, one sop that could be offered to states could be an increase in interest-free long-term loans that the federal government offers for infrastructure projects from the current 1.3 trillion rupees.
Axis Bank expects this allocation to increase by 400 billion Indian rupees.
MARKET BORROWINGS
Despite the spending pressures, the government is likely to maintain or lower its planned market borrowing for the year, as spending in the first half of the year was slow and tax collections have been strong.
Gross market borrowing will be retained at 14.13 trillion rupees, according to a Reuters poll, but some economists say there is scope to reduce the amount.
Borrowing is expected to be reduced by between 400 billion to 500 billion Indian rupees compared to the interim budget, JPMorgan estimates.
($1 = 83.5810 Indian rupees)
(Reporting by Shivangi Acharya and Nikunj Ohri; Editing by Raju Gopalakrishnan)
