India cannot afford populist policies and needs fiscal discipline for sustainable economic growth, Finance Minister Arun Jaitley said ahead of releasing the six-week-old government’s first budget next week.
“If you indulge in mindless populism you burden the exchequer,” Jaitley told an accountants conference in New Delhi last night, without mentioning any specific policies. “You convert yourself into a high taxation society so that you can indulge in populism. It does not work.”
India’s subsidy bill rose fivefold in the past decade under the previous government rule to 2.6 trillion rupees ($43 billion) in the year ending March 31. Government subsidies cover food, fuel and fertilizer in a nation where about two-thirds of 1.2 billion people live on less than $2 per day.
Prime Minister Narendra Modi faces the challenge of narrowing one of Asia’s widest fiscal deficits as he seeks to revive the economy following a landslide election win in May. The scope of the victory has boosted bets he’ll take politically sensitive decisions such as raising fuel prices, a move that would reduce subsidies and help narrow the budget gap.
“The overarching message of the budget is fiscal discipline will be the top most priority,” Shubhada Rao, an economist with Yes Bank Ltd in Mumbai, said by phone. “It will be a judicious mix in which expenditure will be switched toward capital spending while reducing subsidies.”
The rupee, which has gained 2.9 percent this year, strengthened 0.1 percent to 60.0412 per dollar at 10:15 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The yield on the government bond due November 2023 fell to 8.70 percent from 8.74 percent and the S&P BSE Sensex index rose 0.8 percent.
Over the past month, Modi’s government has increased fuel prices and train fares, sparking some minor protests. State-run Indian Oil Corp. raised gasoline prices and diesel prices yesterday, while railway passenger fares were increased by 14.2 percent and freight by 6.5 percent on June 20.
“You have to follow the path of fiscal prudence, have a certain amount of discipline,” Jaitley said. “I am sure we don’t have to wait for the next generation to get the benefits of what we do today. Very soon you would see benefits yourself.”
Reserve Bank of India Governor Raghuram Rajan has called for a fall in subsidy spending while keeping interest rates elevated at 8 percent to combat Asia’s fastest inflation. Price gains are beyond acceptable limits, Jaitley said yesterday.
The prospect of the worst monsoon since 2009 combined with higher oil prices threatens to reignite inflation. Seasonal rains, which account for more than 70 percent of the nation’s annual total, have been 43 percent lower than a 50-year average since June 1, the India Meteorological Department said yesterday.
To discourage exports of onions, a staple for Indians, the government raised the minimum price for overseas shipments by more than 60 percent to $500 per ton, according to a statement today from the trade ministry. It had set the minimum export price of potatoes at $450 per ton last week.
India’s consumer price index jumped 8.28 percent in May from a year earlier, the slowest pace in three months, with fruits surging 23 percent and vegetables 15 percent, Central Statistics Office data showed last month. Wholesale price inflation accelerated to a five-month high of 6.01 percent, the Commerce Ministry reported.
The budget, scheduled to be presented on July 10, will outline spending for the financial year through March 2015. The previous government estimated that India’s budget deficit will fall to 4.1 percent of gross domestic product. The shortfall was 4.5 percent of GDP in the 12 months ending March 31, according to the finance ministry.
India’s budget gap in the two months ended May was 2.41 trillion rupees ($40 billion), the controller general of accounts said on June 30. That’s 46 percent of the full-year target of 5.29 trillion rupees for the year ending March 2015.
While there is a risk Jaitley will revise up the budget deficit target from 4.1 percent of GDP, an accompanying road map to narrow the gap would be “a timely step toward a more credible and transparent budgetary framework,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore.
“Next week’s budget will need the government to tread a tight-rope in an attempt to balance growth objectives and fiscal consolidation,” she wrote in a note today.