Indian Prime Minister Narendra Modi is set to navigate a coalition government after his party, the Bharatiya Janata Party (BJP), lost its parliamentary majority. The new government is likely to target a reduced budget deficit, according to a leading economist.
Neelkanth Mishra, chief economist at Axis Bank Ltd., stated that the fiscal deficit target will be lowered to 4.9% of GDP, down from the previously set 5.1% in February. This change is anticipated as the new administration prepares to announce its budget in the coming weeks.
The fiscal buffer provided by the central bank’s record dividend will be partly used to bring down the deficit.
Neelkanth Mishra Despite potential pressures to increase spending, the central bank’s substantial dividend will provide a fiscal cushion, allowing for a reduced deficit. Mishra shared these insights during an online discussion with Bloomberg’s Menaka Doshi, highlighting key issues investors are monitoring following India’s general election.
The election results have sparked discussions about whether the outcome will lead to more populist spending measures. India’s central bank recently transferred a $25 billion dividend to the government, bolstering its revenue base.
While Modi’s BJP lost its majority, the National Democratic Alliance, of which BJP is a member, secured enough votes to form a government if they remain united. Indian stocks saw a significant decline on Tuesday, losing $386 billion in market value as the election results came in with a narrower-than-expected victory margin for Modi.
Mishra mentioned that the market’s reaction was influenced by unmet exit poll expectations, but he advised against overanalyzing this immediate response. Investors are expected to shift their focus to the monsoon progress and forthcoming government policies.
Analysts suggest that a coalition government might limit Modi’s ability to implement stringent economic reforms, including changes to land and labor laws. Such reforms are crucial for India’s goal of becoming a developed nation by mid-century.
A coalition government could see funding constraints aimed at improving urban infrastructure.
Neelkanth Mishra Mishra noted that the coalition government could face financial constraints in enhancing urban infrastructure. Increased infrastructure spending would have supported the growth of the real estate sector in the coming years.
However, the electoral outcome is not expected to impact India’s bonds, which are poised to be included in JPMorgan’s benchmark emerging-market index later this month, as many investors have already positioned themselves accordingly.
