Populist schemes to push up deficit, report

New Delhi, May 17 (IANS) India will see a coalition government post the polls and such a formation will force it to borrow more to fund populist schemes over the next five years, claims a new report.

The Economist Intelligence Unit report on titled "Coalition blues: After India's 2019 Elections", said that the a key feature of the next government will be that regional parties would hold a sway and "will prevent any significant narrowing in the fiscal deficit" as public expenditure will remain high.

"The need to keep coalition allies sweet will also pressure the next government into raising public expenditure, which will add to the fiscal strains created by the government's populist election pledges, such as the rural employment guarantee scheme," the reports said.

"...We expect to average the equivalent of 3.3 per cent of the GDP over the next five years. This, in turn, underpins our view that significant cuts to corporate tax rates will not occur in the next five years," EIU said.

Several economist's have said that higher deficit is not a good sign of the health of the economy unless the borrowing is used to finance national assets like railways and other basic infrastructure. Higher deficit leads to higher government borrowings which raises the overall interest rates in the market and ultimately slows the economy.

Improvement of fiscal deficit has remained a challenge in India with successive government failing bring in under check either due to election related compulsions of prevailing economic conditions.

After coming to power, the Modi-led government also emphasised on fiscal consolidation that aimed at bringing down the deficit to 3 per cent or below ins its last year. But economic slowdown pushed the Centre to increase spending and deviate from the glide path pushing up deficit to 3.4 per cent in FY19 and target is again higher at 3.4 in FY20 as well.

In its report, EIU has further said that it expects the push towards infrastructure improvement to continue, as this is viewed favourably by both voters and businesses. But a coalition will once again slow down critical labour sector reforms that has remained one big challenge for the past governments too.

The government spending will focus on transport and on urban infrastructure, particularly on improving road networks, and making cities more sustainable, with more reliable power, water and other civic amenities, the EUI.

Despite hurdles associated with excessive red tape, the government has made these areas a priority, and budgetary allocations for them have increased.

Improvements to India's infrastructure will be crucial to boosting the country's manufacturing sector, which struggles to compete internationally owing to high logistics costs and inadequate power supply.

Despite an improved score in the infrastructure category of our latest Business Environment Ranking, India remains a laggard globally; it is ranked 77th out of 82 countries in our assessment of the quality of infrastructure in 2019-23.

This reflects our view that demands on India's infrastructure will continue to far outstrip supply in the period, acting as a dampener on domestic and foreign private investment in manufacturing and services.

The Modi administration had also promised to prioritise agriculture, although arguably its delivery on this front has been patchy. We expect agriculture to remain an important area for the next administration.

However, the focus of the next government's policy will be populist, with short-term assistance provided to farmers outweighing long-term investment in the sector. As such, India's productivity per head in the sector will continue to trail many of its emerging market peers.

(This story has not been edited by Social News XYZ staff and is auto-generated from a syndicated feed.)