Indian equity prices retreated last week despite the modest recovery in economic growth during the September quarter. Three macro worries are being widely mentioned in this context. First, the government has already used up most of its budgeted fiscal firepower for the current fiscal year. Second, global commodity prices continue to rise. Third, inflation has bounced back from its June lows. The Indian economy continues to be on an even keel despite these worries.
The Union budget to be announced early next year is likely to be the last full fiscal statement by the Narendra Modi government before the 2019 national election gets underway. This government has worked hard to deal with the fiscal mess it inherited—and it also got lucky with the sharp decline in global oil prices.
Indian governments have usually tended to loosen fiscal policy before an election, and even though most economists expect the Modi government to miss its fiscal target by a bit this year, its commitment to fiscal prudence will be tested on B-Day 2018.
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