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Modi euphoria meets India reality as first budget looms

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Bloomberg

Narendra Modi, the recently elected Prime Minister of India. Photo: Bloomberg

As Jagdish Thakur trudged from car to car checking tickets on an overnight train from Kolkata to Delhi last week, he had an unwelcome task: telling passengers who had already paid to hand over more cash.

“When the government promised ‘Good Days Ahead’, no one thought that would mean opening their pockets to Modi,” Thakur, 43, said after the 1 450km journey across India, referring to Prime Minister Narendra Modi’s campaign slogan. “Now I spend all night explaining this to sleeping passengers who don’t want to pay.”

Six weeks after Modi’s message of economic development led his party to a landslide election win, he’s already facing complaints among the country’s 1.2 billion people before his first budget. Modi last month vowed to take unpopular steps to restore India’s fiscal health days before his government announced the country’s biggest rail fare increase in 18 months.

Modi faces the challenge of narrowing one of Asia’s widest fiscal deficits as a weaker-than-normal monsoon and surging oil prices threaten to sap revenues and inflate a subsidy bill that has grown fivefold over the past decade. Central bank governor Raghuram Rajan has called for subsidies to be curbed as he keeps interest rates elevated to fight Asia’s fastest inflation.

“This is the Modi moment, and the budget will be like a trailer of what the movie is going to be,” said Raj Kothari, a fixed income trader at Sun Global Investment in London. Without moves to boost growth, narrow the fiscal deficit and improve infrastructure, he said, “the markets will be disappointed”.

India’s benchmark stock index has gained 7 percent since Modi’s win on May 16, among Asia’s top performers in that time, on bets the strongest electoral mandate for an Indian party since 1984 would allow him to make tough choices. His Bharatiya Janata Party promised during the campaign to encourage foreign investment, create manufacturing jobs and modernise roads and railways while simplifying the tax regime.

Finance Minister Arun Jaitley, who will present the budget to parliament on Thursday, this week denounced “mindless populism” and vowed to impose fiscal discipline in a nation where two-thirds of the population lives on less than $2 (R21.50) a day. Last month, he defended the move to increase rail fares by 14 percent, calling it a “difficult but correct decision”.

Analysts are watching to see if Jaitley will keep the previous government’s budget deficit target of 4.1 percent of gross domestic product (GDP) for the year to March, down from 4.5 percent previously.

“The budget itself is almost academic,” said Paul Donovan, the managing director of global economics at UBS in London. It was not what Modi said to parliament that mattered; “it’s what he’s actually going to be able to implement through the complicated federal system and through a bureaucracy that frankly specialises in inertia”.

Jaitley criticised predecessor Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments. Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion.

While planned spending was reduced 14 percent from the budgeted amount in the year to March, subsidies, interest payments and salaries were 0.4 percent higher than estimated. India’s fiscal deficit in the two months to May was 2.4 trillion rupees (R430 billion), or 46 percent of the full-year target.

“India can’t revive its economy by giving fiscal goodies to individuals,” said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore. “Difficult decisions are needed to engineer good days – good days will not fall from the sky.”

Modi has succumbed to popular sentiment on some issues, partially rolling back train fare increases in suburban areas and imposing a higher tax on sugar imports to help mills clear farmer debts. His government also extended excise duty cuts on cars, capital and some consumer goods.

Spending on fuel, food and other subsidies rose to 16 percent of the total budget in the year to March from 9 percent in 2004, according to budget documents.

The prospect of the worst monsoon since 2009 combined with higher oil prices threatens to reignite inflation. India faced a 60 percent chance of drought, forecaster Skymet Weather Services chief executive Jatin Singh said in New Delhi on Friday.

“The major risks for him are oil and water,” said Rupa Rege Nitsure, Mumbai-based chief economist at Bank of Baroda. “His hands will be very, very tied.”

The state would release food grain stock to curb price rises as it sought to curb food hoarding, Jaitley said on Friday. Rajan, who has raised interest rates three times since taking over the central bank in September, kept them on hold last month, and said further tightening was not warranted if consumer price gains remained on course to hit 8 percent by January. Retail prices accelerated 8.28 percent in May.

Commerce Minister Nirmala Sitharaman said on Thursday a consensus was emerging on a goods and services tax that would help broaden the tax base. Jaitley also planned to raise this year’s asset sales target 41 percent to 800bn rupees by selling shares in companies including Coal India and Power Finance, two Finance Ministry officials said last month.

At New Delhi’s main train station, travellers who had to fork over extra cash were not happy. Kapil Chande, a 57-year-old professor, said the higher fares should mean improved service.

“After 10 years of corruption, India is expecting something different,” Chande said. “The first month feels like more of the same.” – Bloomberg


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