PM Modi’s Big Chance Today To Woo Voters Before Polls

PM Modi's Big Chance Today To Woo Voters Before Polls

Budget 2019: A pre-election budget usually covers the period until a new government takes office.

Prime Minister Narendra Modi has a last-ditch attempt to win voters with possible populist spending measures in today’s budget, risking his debt targets in the process.

PM Modi is feeling the heat after his ruling Bharatiya Janata Party lost control of three key states in regional elections last month, setting the stage for a contentious national vote that’s due by May. He’s coming under pressure from a resurgent opposition, which is going all out to lure voters with debt waivers for farmers and pledges of welfare grants for the poor.

Speculation is swirling that the PM’s fiscal plan includes a cash transfer program for farmers entailing an additional spending of 70,000 crore rupees ($9.8 billion), support for small businesses and some reprieve for taxpayers. For investors, that translates into another breach in the budget deficit target of 3.3 per cent of gross domestic product this year and possible record borrowing in the coming year.

“In the event of the incumbent government staying in power or the Congress-led coalition taking over, fiscal policy will likely remain overly loose, with the deficit likely to remain well above the 3 per cent comfort level,” said Prakash Sakpal, an economist at ING Groep NV in Singapore.

Deficit economists in a Bloomberg survey expect the government to widen its target for FY19 to 3.5 per cent of GDP from 3.3 per cent.

Fiscal deficit is forecast to widen to 3.5 per cent of the gross domestic product in the year to March, and reach 3.3 per cent in the next financial year, according to the median estimate in a Bloomberg survey of economists.

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“The fiscal deficit is already at 114.8 per cent of its budgeted target, implying expenditure cuts will have to be substantial if the government is to stick to its budgeted fiscal deficit target of 3.3 per cent in FY19,” said Madhavi Arora, an economist at Edelweiss Securities Pvt.

When including spending and revenue from the various states, country’s deficit shoots up to 6.3 per cent of GDP, according to estimates from Moody’s Investors Service. That’s one of the highest in Asia, and among the reasons the nation’s credit rating remains constrained.

Bond yields have risen in four of the past five weeks, with the yield on the most-traded 2028 security increasing 15 basis points to 7.54 per cent in the past month.

Rate Cuts?

To help make up the revenue shortfall and keep the budget deficit in check, the government may pressure the Reserve Bank of India to pay an early dividend. Some reports suggest new Governor Shaktikanta Das may be asked to stump up as much as 40,000 crore rupees to boost the state’s coffers.

Mr Das is also in a position to give support to the economy through interest rate cuts, providing an extra boost to PM Modi’s government. With inflation at an 18-month low, consumer demand weakening and global risks mounting, economists are betting the RBI will lower rates this year, possibly as early as next week.

What Our Economists Say…

“If the government surprises by abandoning its fiscal targets, yields could rise further. This could make it harder for the Reserve Bank of India to adopt an accommodative stance.”– Abhishek Gupta, Bloomberg Economics.

A pre-election budget usually covers the period until a new government takes office, and isn’t typically used to make major announcements, such as tax changes that would carry over into the next administration. But there’s no law that prevents PM Modi from making significant announcements this week.

“They will announce some doles for the rural economy,” said Jay Shankar, a Delhi-based independent economist. “The bigger questions are: Can we afford it now? Will these measures help the sector and the overall economy? Will it convert into more votes. The answer, to my mind, is in the negative.”

[“source-ndtv”]

Author: Roky