India's Budget Threat In Focus After PM Modi Loses Karnataka

PM Narendra Modi's party, the BJP, lost control of Karmataka last week (PTI photo)

Pranjul Bhandari, chief India economist at HSBC Holdings Plc, said election pressures may prompt the government to cut excise duties rather than raise pump prices, pushing up the deficit. She estimates that for every $10 per barrel rise in global oil prices, the fiscal gap would increase by around 0.3 percent of GDP.

Election Battle

India's rural areas are home to about 68 percent of the nation's 1.3 billion people, and form a key voting bloc in the world's largest democracy. PM Modi has promised to increase the living standards of villagers and double farmers' income by 2022.

In the past six months, the BJP has faced stiff competition from the opposition Congress Party in PM Modi's home state of Gujarat and in by-elections in Bihar, Rajasthan and Uttar Pradesh. While the BJP won more votes in Karnataka than in the last election, it fell short of an overall majority.

The Congress, which is set to form a government in Karnataka with a regional party, is likely to announce programs to appease farmers. More and more states are already offering to write off farm loans.

"The stance of the central and various state governments will turn more pro-rural and possible freebies will mean macro will remain under pressure," analysts at CLSA India Private Ltd. led by Mahesh Nandurkar wrote in a note. "Rural support is the need of the hour for the government given that rural wage growth has been quite weak at 4-6 percent over the last four years."

A recent working paper by the Reserve Bank of India shows growth in rural incomes have been decelerating in the past four years. That was partly due to two consecutive droughts in 2014-15 and 2015-16. In addition, the construction industry, which was booming during 2000-2012 and was a major driver of rural non-farm employment, had slowed down.

Economists at Nomura Holdings Inc. wrote in a report last week that they expect the BJP to focus on lifting rural incomes and alleviating farm distress in coming months given upcoming votes in states like Madhya Pradesh and Rajasthan and the 2019 general election.

But authorities have a fine balancing act in boosting spending to farmers, while keeping the budget deficit under control.

"Doubling farmers' income is a big joke. That's not happening," said Ashok Gulati, a professor at the Indian Council for Research on International Economic Relations in New Delhi. "This is bound to have repercussions for the economy."