New Delhi: The main question surrounding Prime Minister Narendra Modi’s budget on Monday boils down to this: Can he please both farmers and bond investors?

Discontent is rising in rural India after the first back-to-back droughts in about 30 years, adding pressure on Modi to spend more on welfare programmes as he faces a series of key state elections. That’s in addition to a once-in-a-decade pay rise for government employees that may partially come into effect in the fiscal year starting 1 April.

At the same time, bond investors want Modi to tighten the belt and stick with a previously announced goal to lower the federal budget deficit to 3.5% of gross domestic product (GDP). Reserve Bank of India (RBI) governor Raghuram Rajan has warned that an undisciplined budget could boost bond yields, which would imperil India’s credit ratings while also potentially stoking inflation and spooking investors.

“Investors want lower interest rates, higher returns from different asset classes and fiscal consolidation," said Sonal Varma, a Mumbai-based economist with Nomura Holdings Inc. “Voters want a better life, which would require the government to spend more and borrow more. Pleasing both is always tough."

Fiscal deficit

-- India’s fiscal deficit—both central and state governments—is by far the biggest among Asia’s major economies

-- Modi last year deviated from the deficit-reduction path to spend more on infrastructure

-- Current deficit-reduction plan calls for 3.5% of GDP in the next fiscal year and 3% in the year through March 2018; Bloomberg survey sees Modi missing those targets, with economists forecasting 3.6% of GDP next year and 3.4% in the following 12 months

Borrowing costs

-- “Even if budgetary consolidation continues, India’s fiscal metrics will remain weaker than rating peers in the near term," analysts at Moody’s Investors Service wrote in a 23 February report, citing its debt at about 64% of GDP

-- “Bond markets took the revisions to deficit targets in last year’s budget in their stride," said Shilan Shah, an economist at Capital Economics Ltd. “We doubt that markets will be so forgiving this time round"

-- Indian sovereign bonds have turned into Asia’s worst performers in 2016 after the best performance in the previous two years

Living standards

-- India is at once the world’s fastest-growing major economy and home to most of the Earth’s poorest people

-- Official data show India created 296,000 jobs from June 2014 to June 2015 in eight major sectors, compared with about 1 million people who enter the labour force each month

-- Low per-capita incomes limit the tax base, increase pressure for subsidies and underpin a proposed pay hike for about 10 million government employees and military veterans that would boost the wage bill by an estimated 1.1 trillion in the coming fiscal year

Revenue

-- India’s revenue was 12.5% of GDP in 2012, the 12th lowest among more than 100 economies tracked by the World Bank

-- India may raise the service tax rate to 16% from 14.5%, which would boost overall tax revenues by about 15%, according to estimates from State Bank of India’s Soumya Kanti Ghosh

-- Ghosh predicts the government would opt for a “realistic" asset sales target of 30,000 crore in the next fiscal year—57% than the current year

Spending

-- Modi shifted the proportion of expenditure toward infrastructure and away from subsidies in the last two budgets

-- Higher spending on bigger public sector wages, pensions and bank recapitalization will make it hard to stick with fiscal consolidation plans, according to Radhika Rao, an economist at DBS Bank Ltd in Singapore

-- “Government spending on infrastructure is likely to remain a critical engine of economic growth," according to economists at Icra Ltd.

Rural distress

-- Agriculture is reeling from drought, lower guaranteed crop prices and a drop in spending on a work-for-welfare programme

-- The government will retain spending on the rural jobs programme, expand crop insurance and boost irrigation outlays, according to economists at Morgan Stanley

-- Almost half of India’s 1.3 billion population is employed in agriculture, while total investment in the sector is 2.5% of GDP

Manufacturing boost

-- Over the past year, India has been roiled by riots across states as youth demand government jobs

-- Modi’s government last week claimed to win investment pledges of 15.2 trillion—more than triple what India has attracted through foreign direct investment (FDI) since Modi came to office

-- Modi may open more sectors to foreign investment and give tax breaks for labour-intensive sectors such as leather and jewelry, Morgan Stanley says

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