Modi Vows to Make Hard Decisions to Boost India's Finances

Photographer: Raj K Raj/Hindustan Times via Getty Images

Standard & Poor’s has said Indian Prime Minister Narendra Modi’s policies to revive growth and cut the budget deficit will have significant implications for the nation’s credit ratings. Close

Standard & Poor’s has said Indian Prime Minister Narendra Modi’s policies to revive... Read More

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Photographer: Raj K Raj/Hindustan Times via Getty Images

Standard & Poor’s has said Indian Prime Minister Narendra Modi’s policies to revive growth and cut the budget deficit will have significant implications for the nation’s credit ratings.

Indian Prime Minister Narendra Modi said he’s ready to take unpopular steps to improve the nation’s economy and fiscal health as his three-week-old government prepares to unveil its first federal budget next month.

“It’s necessary to take steps to improve financial discipline and improve the economic health of the country,” Modi said on June 14 in a speech in Goa that was posted on his website. “I know my popularity might go down due to these hard decisions, people might be annoyed with me, but they will appreciate it later.”

Modi faces the challenge of reviving Asia’s third-largest economy after his party became the first in 30 years to win a parliamentary majority in India. Growth is holding near a decade low and retail inflation has averaged about 10 percent in the past two years, eroding the purchasing power of more than 800 million people who live on less than $2 a day.

“Modi’s comments suggest the seriousness the government is attaching to the fiscal correction,” N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a government-backed research institute in New Delhi, said by phone. “Fiscal indiscipline has been one of the main reasons behind India’s economic woes.”

The rupee, which has gained 2.7 percent this year, fell 0.7 percent to 60.1650 per dollar in Mumbai today, according to prices from local banks compiled by Bloomberg. The yield on the government bond due November 2023 rose to 8.65 percent from 8.60 percent on June 13 and the S&P BSE Sensex (SENSEX) index retreated 0.2 percent.

Budget Deficit

Finance Minister Arun Jaitley said yesterday that high inflation and slower growth had hurt tax revenues. The previous government estimated that India’s budget deficit will fall to 4.1 percent of gross domestic product in the year through March 2015 from 4.6 percent the previous year.

“Any kind of fiscal indiscipline at this stage will put us in further doldrums,” Press Trust of India quoted Jaitley as telling reporters yesterday in Kashmir.

India’s consumer price index jumped 8.28 percent in May from a year earlier, the slowest pace in three months, Central Statistics Office data showed last week. Wholesale price inflation accelerated to a five-month high of 6.01 percent, the Commerce Ministry reported today.

The rise is partly due to withholding of food stocks amid concerns of a weak monsoon, Jaitley said in comments on his Facebook page today. The government is committed to “ease supply side constraints,” he wrote, without elaborating. The administration is also watching rupee movements closely, Jaitley said, attributing the currency’s recent swings to concern that the violence in Iraq will disrupt oil supplies. A weaker rupee makes imports costlier for India, which ships in about 80 percent of its oil.

‘Bitter Pill’

The Reserve Bank of India held the benchmark interest rate at 8 percent on June 3, and said risks to its target of containing consumer-price gains to no more than 8 percent by January 2015 “remain broadly balanced.” The economy grew 4.7 percent in the year ended March 31, after a decade-low expansion of 4.5 percent the previous year.

Modi faces the challenge of cutting fuel subsidies, allowing more foreign investment and pushing through projects that had been stalled due to delays in approvals. He campaigned on his record of delivering economic growth as chief minister of Gujarat state and promised to stem consumer-price gains.

“To take the country out of its economic ill-health, taking hard decisions and administering a bitter pill when required will be necessary,” Modi said in the Goa speech.

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net Sam Nagarajan

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