India breaches deficit goals to woo voters

The govt aims for 3.3% in 2019 rather than its earlier 3% goal


NEW DELHIIndia will miss its de cit targets as Prime Minister Narendra Modi looks to placate angry rural voters and create jobs before national elections next year.

The budget shortfall will be 3.5% in the year ending March 31, Finance Minister Arun Jaitley told lawmakers in New Delhi yesterday, wider than the previous 3.2% target. The government will aim for 3.3% next year rather than its earlier 3% goal. Most economists in a Bloomberg survey had predicted 3.5% and 3.2% respectively.

“We have taken up programmes to direct the benefits of structural reforms and good growth to reach the farmers, poor and other vulnerable sections of the society and uplift the underdeveloped regions,” Jaitley said. “This year’s budget will consolidate these aims and particularly focus on strengthening agriculture and rural economy.”

Bonds, stocks, and the rupee fell after Bloomberg first reported on the deficit breach. Apart from higher spending on farmers, Jaitley also announced tax breaks for small companies and imposed a levy on equity-trading gains as his government looks to offset revenue losses while hopefully creating more jobs before the elections. Unemployment is the biggest concern for Indians, according to a private survey conducted last month.

Investors have been sceptical of the government’s longstanding vow to improve public finances — rising yields made the nation Asia’s worst-performing fixed income market over the past quarter. Higher spending also complicates policy for the central bank, which meets next week to review interest rates amid accelerating inflation.

“In the background there have been a few election results that have not been exactly in favour of the ruling party. People may have been getting impatient in the terms of progress at their level,” Chetan Ahya, chief Asia economist at Morgan Stanley, said in an interview with Bloomberg TV before the announcement. “So there is pressure on the government to do something, so that some of the progress is shared.”

India Budget 2018: Winners and Losers

Farm stocks surged and healthcare and insurance shares rose soon after the announcements.

However, the main equity index was trading 0.4% lower as of 1:05pm in Mumbai yesterday and the rupee weakened 0.4% to 63.83 a dollar. Yield on the benchmark 10-year bond rose eight basis points to 7.5%.

Eye on Elections

Modi’s party faces as many as eight state elections this year after economic woes contributed to its worst showing in more than two decades in a vote in his home state in 2017. Then there’s the national poll early in 2019. While the ruling party and its allies would still win a majority were elections held yesterday, clear rumblings of discontent are visible below the surface, according to a survey by Lokniti-CSDS-ABP News last month.

Support for the Modi-led alliance among farmers, traders and shopkeepers has fallen to 43% from 50% since May 2017 and most voters identified unemployment as being India’s biggest problem.

However, there’s little space for monetary stimulus after inflation breached the central bank’s target. The Reserve Bank of India will keep the benchmark repurchase rate at 6% on Feb 7, according to most economists in a Bloomberg survey conducted before the budget announcement. — Bloomberg