Deutsche Bank Says Purse Strings Soon To Be Loosened By India’s Government

India’s government is about to embark on a spending spree, if historical facts and figures are to be believed.

During the last two years of an Indian government’s five-year long term, there is generally a significant pick up in government spending, shows an analysis by Deutsche Bank analysis. And with three years behind him as of May and a general election due in 2019, that’s exactly where Prime Minister Narendra Modi’s administration is right now.

There is much sense in the uptick in government spending. By boosting spending on infrastructure projects growth is boosted, the government wants to show, and hence exhibit to the voters that the government is doing its part to create jobs and boost growth. This is the path that is generally historically adopted by Indian politicians as is also the case in other democracies. Indian Prime Minister Modi will certainly want to quicken the pace of job creation before he faces voters since the anemic job growth of the country is undoubtedly one of the biggest political risks that is faced by this political party in the world’s fastest growing major economy.

“Governments need to show that things are happening, that jobs are being created,” Deutsche Bank analyst Abhay Laijawala said in an interview.

Compared on a year to year basis, there was growth in government spending and expenditure of 14 percent for the Bharatiya Janata Party government in the early 2000s and a 12.1 percent increase in the last two years of the Congress government in the 1990s, Laijawala estimated in an April 26 note.

In the following two-term Congress administration, there was another pickup in the first term for both the governmental stints. However, year-over-year government expenditure in the last two years did not outpace the first three years, in the second term of the last Congress government, between 2009 and 2014, as the government was hit with corruption scandals.

Promising to write off farmer loans, as Modi’s BJP did in the state of Uttar Pradesh recently, Indian political parties can get populist in the run up to elections. But Laijawala said that since the country’s national government is too conscious of its credit rating, it would not potentially be possible for the present government to go overboard with populist policies and announcements. He said that the government is “extremely cognizant of the way the world sees them,” he said. The government therefore won’t stray from its fiscal deficit target, he added.

Laijawala said in his note that companies in materials such as cement, industrials, utilities and IT services are set to benefit from the spending spree when talking in terms of winners and losers.

With the Bharatiya Janata Party government spending 34.5 percent more in the early 2000s (mainly on roads), capital expenditures tended to lead the increase in government expenditures, he found.

Laijawala said that private sector capital expenditures could increase if Modi tackles India’s bad loan problem and also manages to tweaks legislation to enable bureaucrats to approve projects without fear of being caught up in corruption.

He however added that some near-term economic disruption could be caused by India’s implementation of a nation-wide GST starting in July.

(Adapted from Bloomberg)

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Categories: Economy & Finance, Uncategorized

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