India's budget will need to be extra mindful of bond market hawks now
Things seem to be falling comfortably into place for Indian Prime Minister Narendra Modi. Yes, he lost seats in India’s recent general election—but he was, nevertheless, re-elected for a third term. Yes, he is dependent upon allied parties for the first time in his political career.
But those allies have been complaisant so far, and he has kept them out of major ministerial roles without any blowback. That period of calm may be coming to an end, however. This Tuesday, India will unveil its tax-and-spending plans for the ongoing financial year, which ends on 31 March 2025—and, according to Reuters, the allies’ bills will come due.
The two largest regional parties in Modi’s coalition are together apparently asking for $5.75 billion of federal government funds to be transferred to their regions and preferred programmes over the next eight months. Chandrababu Naidu, chief minister of Andhra Pradesh, wants to build a new capital city for his state. Nitish Kumar, who runs India’s poorest state of Bihar, has made a name for himself as a designer of clever but expensive welfare schemes.
Modi’s administration is fiscally conservative. It doesn’t like spending two rupees when one would do, and won’t spend that rupee if it could make a costless contingent guarantee instead. Thanks to those instincts, the government managed to control its spending during the pandemic years and has emerged from that crisis with a clear path for fiscal consolidation.
The interim budget in February promised that the deficit would shrink to below 4.5% of GDP by March 2026. While financial markets may quibble over the details, there’s agreement on the direction of India’s deficit: downwards. The Modi government needs to preserve that trust, even when
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