Modi's coalition govt likely to follow fiscal consolidation path, with slight populist tilt: UBS report

During this, Modi will address a farmers' conference and its venue is being decided

Prime Minister Narendra Modi-led coalition government at the Centre will remain on the fiscal consolidation path with a tilt towards populist schemes, global wealth management firm UBS said in a note on June 10.

The Switzerland-based firm said the government will target a fiscal deficit of 5.1 percent of GDP in FY24-25 and reduce it down below 4.5 percent by FY26.

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Bharatiya Janata Party (BJP) formed the government at the Centre for the third time after Modi took oath as the prime minister of the country on June 9. However, the survival of PM Modi’s national democratic alliance-led government will depend on two crucial coalition partners- Nitish Kumar’s Janata Dal (United) (JDU) and N Chandrababu Naidu’s Telugu Desam Party (TDP).

There have been speculations that the government will have to spend more to appease its coalition partners. While, TDP’s demand list has special category status for Andhra Pradesh and funds for new capital Amravati, among others, Kumar also has long demanded special status for Bihar.

Rating agencies and analysts have said the government may step up welfare spending as well as support for states represented by partners in the National Democratic Alliance.

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On Monday, the government reappointed Nirmala Sitharaman as finance minister, signalling broad continuity in policies.

However, if a top official in the government is to be believed, there won’t be any fiscal loosening in the current financial year.

"There will be no fiscal loosening at least in 2024-25," the official said, declining to be identified as government budget discussions were confidential.

The official added that if states demand immediate financial assistance, there is enough room within the budget to accommodate those requests.

Meanwhile, Ridham Desai of Morgan Stanley believes the government will keep its focus on macro stability and policy continuity and accelerate its path to fiscal consolidation in the new term.

“I see an acceleration actually. Because Covid did derail some of the fiscal consolidation. I see India into a primary balance in three years making it the only large country in the world with a primary balance,” Desai said in an interview with CNBC-TV18 on June 10.

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In February when announcing its interim budget, the government set a fiscal deficit target of 5.1 percent of GDP, down from a revised 5.6% the previous year. The final budget will be presented in July.

The interim budget provides for loans of Rs 1 lakh crore ($12 billion) to states which they can use for capital spending and another Rs 75,000 crore of loans for states that undertake certain reforms. Numbers presented in the final budget will be broadly similar to the interim budget, the source added.

With inputs from Reuters