The Indian economy is one of the few bright spots in the world in terms of growth. GDP expanded at a rate of 7.3 percent in 2015, a slight acceleration compared to 2014’s figure and is widely expected to see faster growth this year. The IMF, for instance, forecasted growth rates of 7.3 percent and 7.5 percent in fiscal years (FY, the period from April to March) 15-16 and 16-17, respectively. The recent Indian budget implicitly assumes a slightly higher growth, at around 7.3 percent and 7.7 percent, according to our estimates based on the government’s nominal numbers. In our view, Indian growth will accelerate timidly in real terms over the next quarters, led by consumption and investment, outperforming most emerging economies. However, there are some downside risks.

The three main factors that could derail growth are price instability, loss of investment momentum and vulnerabilities in bank’s balance sheets. Inflation seems under control, but the latest improvements rely on low food inflation and energy prices. Adverse weather effects and a pickup in oil prices — which is entirely imported — could revive inflationary pressures, forcing the central bank to increase policy rates and the government to spend more on subsidies. The political stalemate, which is blocking essential reforms, could also harm growth, as investors could lose their confidence on the implementation of promised reforms. In the last years, net foreign investment (FDI) flows grew along with the economy, from Rs.1,108 billion in 2011 to Rs.2,112 billion in the last four quarters. Losing reforms momentum could hurt FDI and economic activity. Finally, the IMF also warned about asset quality and low capital ratios of state-owned Indian banks, which might result in insufficient quality lending and financial instability.

The budget for FY 16-17 addresses these potential risks to some extent. The focus on the rural sector is not only intended to improve the livelihood of economically depressed areas, but also to secure food supply and control prices. Projects such as irrigation systems, food storage facilities and rural road networks are detailed in the developments plans, and could have a positive impact on price stability. Beyond rural issues, energy (29.2 percent) and communications (34.5 percent) still represent the bulk of the budget. Spending in investment in these areas will contribute to raise investor confidence. Moreover, the budget includes an allocation of Rs.250 billion (11 percent of commercial bank assets) for public banks to strengthen their balance sheets. The Indian government also stressed the commitment of listing public companies in the stock exchange, which could provide additional capital and improve corporate governance.

Downside risks remain considerable, but the budget contributes to reduce them somewhat. However, its release did not come free of criticism. The assumptions behind the budget, particularly nominal GDP growth (10.8 percent) and oil prices ($42 per barrel) have been regarded as over-optimistic. Lower growth would imply lower revenue from taxes and an automatic increase of the deficit. Higher oil prices would increase the political costs of introducing new taxation on gasoline and diesel, and increase the energy subsidy bill.

If these assumptions do not materialize, the reduction of India’s deficit from 3.9 percent to 3.5 percent of GDP will prove elusive, and fiscal sustainability, in spite of not representing an immediate threat, will worsen. Overall, the budget addresses India’s main needs and concentrates on preventing some of its main threats from materializing.

— Jordi Rof is economist at Asiya Investments Company.