Angry Young, Rural Voters to Set Economic Tone for India in 2018

  • Government will ease budget deficit target for FY19: survey
  • Job creation a key focus area before 2019 national vote: UBS

Prime Minister Narendra Modi will probably boost spending to retain young voters and those in India’s hinterland, who are straying away from his party as joblessness grows.

Prime Minister Modi

Photographer: Dhiraj Singh/Bloomberg

The government will target a budget deficit of 3.2 of gross domestic product in the year starting April 1, according to a Bloomberg survey published this month, wider than the previous goal of 3 percent. Higher expenditure will stoke inflation that’s seen accelerating to 4.6 percent from 3.5 percent the previous year and boost GDP growth to 7.5 percent from a projected 6.7 percent.

More people aged 18-25 are estimated to have voted for the opposition in an election in Modi’s home state of Gujarat, which ended with the ruling party getting its lowest seat tally in more than two decades. His Bharatiya Janata Party was pushed across the finish line largely because of its urban voters, which is acceptable for this region because of its higher urbanization rate but could backfire in a slew of state elections next year and a national vote in 2019.

Losing Out

Surveys suggest weaker vote shares for Modi's BJP in rural areas, younger populations

Source: India Today-Axis My India exit poll for Gujarat, Credit Suisse

"The BJP is unlikely to interpret these results as business-as-usual," Neelkanth Mishra and Deepali Bhargava, analysts at Credit Suisse Group AG, wrote in a Dec. 18 report. They predict the budget due February will focus on rising farm distress and unveil cash transfers for fertilizer subsidies, crop insurance and possibly higher guaranteed crop prices.

Fiscal Slippage

"However, contrary to widely held beliefs, we do not expect a fiscal slippage," they said, predicting a 3.1 percent shortfall for next year versus the 3.2 percent current-year target.

Bank of America Merrill Lynch sees the government retaining 3.2 percent for next year, as write offs on farm loans will probably double to $40 billion by the time Modi faces re-election early 2019. Its economists Indranil Sen Gupta and Aastha Gudwani said the federal government -- which raised salaries for its employees last year -- could extend this to staff of state-run companies, and provincial administrations will rush to follow its lead.

Read: Deepest India Bond Rout in 17 Years Shows No Sign of Abating

The budget should also raise the income tax exemption limit, they said, adding that "we reiterate our call of playing consumption over investment."

Still Dim

India's employment outlook is getting better, but only slowly

Source: Manpower Inc.

* Survey based on interviews with almost 5,000 employers in India. About 21% see employment increasing in their location during January-March 2018 from the previous quarter

While India’s consumption growth has been perceived as resilient, it’s largely being funded by declining savings, so a pickup in employment is needed to sustain or spur demand, according to analysts at UBS Group AG.

Read: Stagflation Risks Could See India Hold Rates Through 2018

"Our discussions with macro experts and government officials indicate that job creation remains a key focus area, especially going into the 2019 general elections," they said.

The central bank is expected to keep policy rates unchanged, betting that the government’s move to inject a record $32 billion into struggling state lenders will be enough to revive private investment from a six-year slowdown.

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