Mumbai: Prime Minister Narendra Modi’s “lower political capital” will make it difficult for the new government to implement hard reforms, a Swiss brokerage said on Monday. The potential rate of growth can go up to over 7.5 per cent, if the government is able to implement tougher reforms like those related to land, farming, divestments, Uniform Civil Code and one nation one election, UBS Securities said.
“The implementation of hard reforms can take the potential rate of growth to 7.5 per cent-plus over the next five years, from the present 6.5-7 per cent,” its chief India Economist Tanvee Gupta Jain told reporters here.
“…tougher reforms will be pushed out as political capital is lower vis-a-vis 2019 and 2014 elections,” she said, referring to the ruling BJP’s reliance on partners of the National Democratic Alliance (NDA) in its third term of the government led by Prime Minister Narendra Modi.
The government will continue with reforms like continuing with the boost to manufacturing, implement the previously-passed labour laws over the next 12-18 months, focus on skill development and creating blue-collar jobs, she said.
“We think implementation of tougher reforms including land reforms, a big boost to infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections, amongst others, will be challenging,” she said.
Jain said the growth momentum is robust, and retained her FY25 real GDP growth estimate at 7 per cent.
She said next month’s Union Budget is the key policy announcement to watch out for, and added that the new government will continue with the fiscal consolidation path.
The FY25 fiscal deficit number may be retained at 5.1 per cent or may be at 5 per cent as well by the new government, Jain said, pointing out to the Rs 2.11 lakh crore dividend by RBI as a comforting factor which will ensure that all the plans announced earlier go through.
The government is likely to use the leeway presented by the RBI dividend for social sector spending, she said, adding that the same will increase to 8-9 per cent in FY25 as against the interim budget’s estimate of 6 per cent.
The higher social sector spends will be driven by a renewed focus on populism, Jain said, adding that she does not expect big-ticket divestment moves at least in FY25.
The brokerage expects no rate cut from the RBI in 2024, Jain said, adding that the economy is doing well and it does not require any push from the monetary policy.
However, there can be shallow rate cuts of up to 0.50 per cent in 2025 as inflation ebbs, she said.
The dichotomy between the slower growth in consumption at 4 per cent and the economic growth of over 8 per cent can be explained by the ‘K-shaped’ growth since Covid, where the affluent are driving the activity, Jain said, adding that she expects the rural consumption to recover in FY25.
The brokerage said it expects the benchmark security yield at 6.6 per cent by end of FY25 as against the present 7 per cent once the foreign inflows open up with the inclusion in global bond indices and lower inflation.
RBI’s curbs on unsecured lending and the high base will result in the credit growth moderating to 13 per cent in FY25, she said.
