Modi Euphoria Meets India Reality as Budget Choices Loom

As Jagdish Thakur trudged from car to car checking tickets on an overnight train from Kolkata to Delhi last week, he had an unwelcome task: Telling passengers who already paid to hand over more cash.

“When the government promised ‘Good Days Ahead,’ no one thought that would mean opening their pockets to Modi,” Thakur, 43, said after the 900-mile (1,450-kilometer) journey across India, referring to Prime Minister Narendra Modi’s campaign slogan. “Now I spend all night explaining this to sleeping passengers who don’t want to pay.”

Six weeks after Modi’s message of economic development led his party to a landslide election win, he’s already facing complaints among the country’s 1.2 billion people before his first budget. Modi last month vowed to take unpopular steps to restore India’s fiscal health days before his government announced the country’s biggest rail fare increase in 18 months.

Modi faces the challenge of narrowing one of Asia’s widest fiscal deficits as a weaker-than-normal monsoon and surging oil prices threaten to sap revenues and inflate a subsidy bill that has grown fivefold over the past decade. Central bank Governor Raghuram Rajan has called for the giveaways to be curbed as he keeps interest rates elevated to fight Asia’s fastest inflation.

“This is the Modi moment, and the budget will be like a trailer of what the movie is going to be,” Raj Kothari, a London-based fixed-income trader dealing in emerging market assets at Sun Global Investment Ltd., said by phone. Without moves to boost growth, narrow the fiscal deficit and improve infrastructure, he said, “the markets will be disappointed.”

Stocks Gain

India’s benchmark stock index has gained 7 percent since Modi’s win on May 16, among Asia’s top performers in that time, on bets the strongest electoral mandate for an Indian party since 1984 would allow him to make tough choices. His Bharatiya Janata Party promised during the campaign to encourage foreign investment, create manufacturing jobs and modernize roads and railways while simplifying the tax regime.

Finance Minister Arun Jaitley, who will present the budget to parliament on July 10, this week denounced “mindless populism” and vowed to impose fiscal discipline in a nation where two-thirds of the population lives on less than $2 per day. Last month he defended the move to increase rail fares by 14 percent, calling it a “difficult but correct decision.”

Analysts are watching to see if Jaitley will keep the previous government’s budget deficit target of 4.1 percent of gross domestic product for the year through March 2015, down from 4.5 percent in the previous 12 months. DBS Bank Ltd. and Nomura Holdings Inc. predict a rise to 4.5 percent, while UBS AG and Standard Chartered Plc expect him to keep it at 4.1 percent.

Implementation Key

“The budget itself is almost academic,” said Paul Donovan, managing director for global economics at UBS in London. “It’s not what Modi stands up and pronounces to the Indian parliament that matters, it’s what he’s actually going to be able to implement through the complicated federal system and through a bureaucracy that frankly specializes in inertia.”

Jaitley criticized predecessor Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments. Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion.

While plan spending was reduced 14 percent from the budgeted amount in the year ended March 31, subsidies, interest payments and salaries were 0.4 percent higher than estimated, even with some payments deferred to this financial year. India’s fiscal deficit in the two months ended May was 2.4 trillion rupees ($40 billion), or 46 percent of the full-year target.

‘Fiscal Goodies’

“India can’t revive its economy by giving fiscal goodies to individuals,” said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore. “Difficult decisions are needed to engineer good days -- good days will not fall from the sky.”

Modi has succumbed to popular sentiment on some issues, partially rolling back train fare increase in suburban areas and imposing a higher tax on sugar imports to help mills clear farmer debts. His government also extended excise duty cuts on cars, capital and some consumer goods announced by Chidambaram.

Spending on fuel, food, fertilizer and other subsidies rose to 16 percent of India’s total budget in the year ended March 2014 from 9 percent in 2004, while plan spending climbed to 30 percent from 26 percent, according to budget documents.

Oil, Rain

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, according to the India Meteorological Department. India faces a 60 percent chance of drought, private forecaster Skymet Weather Services Chief Executive Officer Jatin Singh said in New Delhi today.

“The major risks for him are oil and water,” said Rupa Rege Nitsure, Mumbai-based chief economist at Bank of Baroda. “His hands will be very, very tied.”

The government will release food grain stock to curb price rises as it seeks to curb food hoarding, Jaitley said today. Rajan, who raised interest rates three times since taking over the central bank in September, kept them on hold in June and said further tightening isn’t warranted if consumer-price gains stay on course to hit 8 percent by January 2015. Retail prices accelerated 8.28 percent in May, the fastest among 18 Asia-Pacific economies tracked by Bloomberg.

Raising Cash

Commerce Minister Nirmala Sitharaman said yesterday a consensus is emerging on a goods and services tax that would help broaden the tax base. Jaitley also plans to raise this year’s asset-sales target 41 percent to 800 billion rupees ($13.3 billion) by selling shares in companies including Coal India Ltd. and Power Finance Corp, two finance ministry officials with knowledge of the matter said last month.

At New Delhi’s main train station, where Thakur counted a wad of rupees from increased rail fares, travelers who had to fork over the cash weren’t happy. Kapil Chande, a 57-year-old professor, said the higher fares should mean improved service.

“After 10 years of corruption, India is expecting something different,” Chande said while rolling his suitcases under his air-conditioned sleeper seat. “The first month feels like more of the same.”

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