India’s national election has returned BJP-led National Democratic Alliance for the third time to power but the final seat tally has been significantly lower than predicted by the Exit polls (~370 seats) and achieved in 2019 (353 seats). In particular, the loss of seats for NDA has been concentrated in Uttar Pradesh (-29), Maharashtra (-19) and parts of Rajasthan (-11) and Haryana (-5).
There would be a bias of markets as the new government will have to focus on more populist policies in the budget. Given higher RBI dividend and lower fiscal deficit for FY24, there is 0.35 per cent of GDP (INR 1.2trn) additional fiscal space available to the government for FY25 even if they want to exactly meet the interim budget target of 5.1 per cent of GDP, revealed a latest report by Citi Research.
This should give enough scope to continue with the budgeted capex plan presented in the interim budget with less chances of any reduction in capital expenditure.
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There is no significant risk of additional borrowing in FY25 and even the 4.5 per cent of GDP fiscal deficit target for FY26 might not be too much at risk but given the election outcome, there might not be any acceleration in the timeline which markets were hoping for, the report said.
The budget document needs to reconfirm the government’s commitment to the fiscal glide path, especially when India is aspiring for a rating upgrade.
The government will further continue to have a very conservative approach towards inflation management, but the markets would probably be a little wary of inflation risks if the quantum of populist spending is large, said the Citi report.
In the very near term, the focus could be on the extent of increase in Minimum Support Prices that the government proposes later this month/early next month.
Focus on rural & agriculture
Some new spending focused on poor, women and rural areas, for which there is enough space at least for this year cannot be ruled out, said the report by Citi Research.
Another report by Bernstein seconded this finding, highlighting that agriculture and rural may start getting noticed.
BJP’s performance in the rural seats, which is more than 60 per cent of the total constituencies in India, has witnessed the party’s biggest losses with current projections showing a loss of 70 seats in the rural areas.
Rural and farm distress is real, and the growth in agriculture this year has been the slowest since FY15-16 when there was droughts for two successive years. The private consumption, which makes up 56 per cent of the total GDP, is at the slowest pace in 21 years. Clearly, the 5kg food distribution scheme hasn’t worked, and more will need to be done in this field to arrest a declining popularity, the Bernstein report highlighted.
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There won’t be a major shift in policy stance, but there is possibility of some respite coming to farmers by way of larger MSP increases.
The government may follow a middle path instead of adhering to the C2 formula, which may give a slight impetus to consumption but may not materially change the consumption equation. With normal monsoons forecast for this year, the need for rapid shifts reduces as well, the report further added.
Employment creation to move up
If the poll assessment is that lack of job opportunities was a deciding factor in the votes, then employment creation could move up in the economic agenda, highlighted the report by Citi.
This could be either through a renewed focus on skill development or channelizing more credit to foster self-employment among the 250 million people who have been brought out of poverty in the last 10 years.
Rajani Sinha, Chief Economist, CareEdge Ratings said that creating enough job opportunities to absorb India’s burgeoning workforce would be a critical focus area of the new government.
“While India’s large and growing population gives it the opportunity of reaping demographic dividend, if the population is not adequately skilled and enough job opportunities are not created, it can become a burden for the economy,” Sinha stated.
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Infra, manufacturing & technology to be key growth drivers
The broad agenda of infrastructure, manufacturing and technology will take India’s economy forward, most likely not take a backseat, said the report by Citi.
However, the contentious structural reforms might be delayed till some of the political headwinds for NDA recede.
A lot of economic policy action does not require legislative approval and even if they require, a simple majority in the parliament is good enough. The government would also have to consider whether their supply side measures need to be bolstered by some demand side impetus too, the report added.
