The main question surrounding Prime Minister Narendra Modi’s budget on Monday boils down to this Can he please both farmers and bond investors?
Discontent is rising in rural India after the first back-to-back droughts in about 30 years, adding pressure on Modi to spend more on welfare programmes as he faces a series of key state elections. That’s in addition to a once-in-a-decade pay rise for government employees that may partially come into effect in the fiscal year starting 1 April.
At the same time, bond investors want Modi to tighten the belt and stick with a previously announced goal to lower the federal budget deficit to 3.5% of gross domestic product (GDP).
Reserve Bank of India (RBI) governor Raghuram Rajan has warned that an undisciplined budget could boost bond yields, which would imperil India’s credit ratings while also potentially stoking inflation and spooking investors.
“Investors want lower interest rates, higher returns from different asset classes and fiscal consolidation,” said Sonal Varma, a Mumbai-based economist with Nomura Holdings Inc. “Voters want a better life, which would require the government to spend more and borrow more. Pleasing both is always tough” he added.
