Modi Euphoria fades as tough road ahead

As Jagdish Thakur trudged from car to car checking tickets on an overnight train from Kolkata to Delhi last week, he had an unwelcome task: Telling passengers who already paid to hand over more cash.
“When the government promised ‘Good Days Ahead,’ no one thought that would mean opening their pockets to Modi,” Thakur, 43, said after the 900-mile (1,450-kilometer) journey across India, referring to Prime Minister Narendra Modi’s campaign slogan. “Now I spend all night explaining this to sleeping passengers who don’t want to pay.”
Six weeks after Modi’s message of economic development led his party to a landslide election win, he’s already facing complaints among the country’s 1.2 billion people before his first budget. Modi last month vowed to take unpopular steps to restore India’s fiscal health days before his government announced the country’s biggest rail fare increase in 18 months.
Modi faces the challenge of narrowing one of Asia’s widest fiscal deficits as a weaker-than-normal monsoon and surging oil prices threaten to sap revenues and inflate a subsidy bill that has grown fivefold over the past decade. Central bank Governor Raghuram Rajan has called for the giveaways to be curbed as he keeps interest rates elevated to fight Asia’s fastest inflation.
Implementation Key
Raising Cash
“The budget itself is almost academic,” said Paul Donovan, managing director for global economics at UBS in London. “It’s not what Modi stands up and pronounces to the Indian parliament that matters, it’s what he’s actually going to be able to implement through the complicated federal system and through a bureaucracy that frankly specializes in inertia.”
Jaitley criticized predecessor Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments. Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion.
While plan spending was reduced 14 percent from the budgeted amount in the year ended March 31, subsidies, interest payments and salaries were 0.4 percent higher than estimated, even with some payments deferred to this financial year. India’s fiscal deficit in the two months ended May was 2.4 trillion rupees ($40 billion), or 46 percent of the full-year target.
Oil, Rain
The prospect of the worst monsoon since 2009 combined with higher oil prices threatens to reignite inflation. Seasonal rains, which account for more than 70 percent of the nation’s annual total, have been 43 percent lower than a 50-year average since June 1, according to the India Meteorological Department. India faces a 60 percent chance of drought, private forecaster Skymet Weather Services Chief Executive Officer Jatin Singh said in New Delhi today.
“The major risks for him are oil and water,” said Rupa Rege Nitsure, Mumbai-based chief economist at Bank of Baroda. “His hands will be very, very tied.”
The government will release food grain stock to curb price rises as it seeks to curb food hoarding, Jaitley said today. Rajan, who raised interest rates three times since taking over the central bank in September, kept them on hold in June and said further tightening isn’t warranted if consumer-price gains stay on course to hit 8 percent by January 2015. Retail prices accelerated 8.28 percent in May, the fastest among 18 Asia-Pacific economies tracked by Bloomberg.
Commerce Minister Nirmala Sitharaman said yesterday a consensus is emerging on a goods and services tax that would help broaden the tax base. Jaitley also plans to raise this year’s asset-sales target 41 percent to 800 billion rupees ($13.3 billion) by selling shares in companies includingCoal India Ltd. (COAL) and Power Finance Corp, two finance ministry officials with knowledge of the matter said last month.