Modi’s pre-election handouts to cost India billions, breach fiscal target

Reuters: A series of vote-catching measures planned by Indian Prime Minister Narendra Modi as he braces for a difficult general election may cost more than 1 trillion rupees ($14 billion), two sources with direct knowledge of the matter said. Much of the cost of the extra spending or revenue losses would have to be borne by  the government that will take charge after the election due by May. The spending is also likely to delay plans to reduce the government’s budget deficit, a key indicator of the nation’s economic health.
Modi’s Bharatiya Janata Party (BJP) lost three major state elections at the end of last year, largely due to anger in rural India in the face of low crop prices and rising costs. Modi remains the front-runner for the general election, according to opinion polls, but his once-invincible image has been dealt a heavy blow.
The government is expected to unveil handouts mostly aimed at farmers in an interim budget to be presented on Feb. 1, said the sources, both government officials. While no final decisions have been taken, the measures could include direct transfers of funds into farmers’ bank accounts and interest-free loans for them.
The giveaways will come on top of tax sops, job reservations and policies favoring local businesses that have already been made public. The new measures have to be announced before election dates are finalised by the Election Commission, possibly in March or April, after which there will be curbs on policies that could influence voting.
A spokesman for the Ministry of Finance did not respond to an e-mail seeking comment. The BJP’s economic affairs spokesman, Gopal Krishna Agarwal, told Reuters this week that the party favored an expansionary economic policy that would give space to growth-boosting measures as inflation stays low.
The BJP also does not consider the finance ministry’s plan to keep the fiscal deficit to 3.3 percent of gross domestic product in the current April-March fiscal year as “sacrosanct”, he said, comments which pushed bond yields higher and hurt the rupee.
“Addressing farmer distress is the most important thing,” Agarwal told Reuters. “You need an expansionary policy. You chase growth in the economy, you do not chase these parameters like fiscal deficit.”
India’s federal fiscal deficit was 5.9 trillion rupees, or 3.5 percent of GDP, in the 2017-18 fiscal year.
Since the state election losses, Modi’s government has exempted many small businesses from paying taxes under a unified goods and services tax (GST), and is considering raising the income level at which people need to pay personal tax.
The government also plans to spend millions of dollars to add new seats in colleges and universities to accommodate a 10 percent quota announced recently for the less well-off among upper caste Hindus and people from other religions.
The Congress party, the main opposition, called it the reaction of a “panic-stricken” administration.
“Fearing an impending loss in the election, the government wants to bandage this crisis situation by giving interest-free loans and income-support schemes,” said Gourav Vallabh, a Congress spokesman. “Like all other schemes, this is a hurriedly prepared scheme by a panic-stricken Modi government.”