Spending push in Modi 2.0 to give a huge boost to economy

India’s economy is set for a major boost if Prime Minister Narendra Modi follows through with key campaign promises following his party’s sweeping election victory.

The BJP pledged cash handouts to farmers, $1.44 trillion to build roads, railways and other infrastructure, a boost to manufacturing, and a doubling in exports. Those promises, along with tax cuts for middle class Indians, resonated with voters, who gave the BJP a majority of the seats in the parliament, according to official results on Thursday.

The economy is in need of stimulus. Consumer spending has taken a knock as a crisis among shadow banks curbed lending. Invest-ments have slowed and unofficial figures show a pick-up in unemployment. Economists are forecasting economic growth of 6.5 per cent in the three months to March, which would be the slowest pace since mid-2017.

Finding the money to pay for the populist pledges will be Modi’s immediate challenge. The government has already widened its budget deficit target for the year through March 2020 to 3.4 per cent of gross domestic product.

With revenues under strain, the government is borrowing more and seeking to extract additional capital from the central bank. Any further widening in the fiscal deficit would jeopardise the nation’s credit rating.

Fitch Ratings Ltd. said on Thursday improving the nation’s weak government finances will be crucial for the new administration. Fiscal consolidation stalled under the BJP in recent years and its campaign promise to support farm incomes has added to spending pressure, it said.

“Given that there is limited fiscal space it is hard to see them meeting those targets,” said Shilan Shah, Senior India Economist at Capital Economics Ltd. in Singapore. “But even if they are partially fulfilled, it should provide some boost to growth.”

The BJP’s manifesto targets Rs 100 lakh crore ($1.44 trillion) of capital investment in infrastructure by 2024. It’s a huge commitment considering the government’s expenditure on roads and railways was about Rs 1.2 trillion for the year to March 2019.

“The economy continues to slow and we expect to see more pain before a gradual recovery starts taking shape later in the year. In our view, a BJP majority on its own is likely to aid a speedier recovery. The reason -- political stability and continuity in the rule of law is attracting more foreign capital inflows,” said Abhishek Gupta, Economist at Bloomberg.

Modi’s economic record in his first term was patchy. He reduced red tape, overhauled centuriesold bankruptcy laws and introduced a nationwide sales tax, which won him praise from investors. But the chaotic roll-out of the new tax system and the shock ban of high-value currency notes in 2016 to combat corruption disrupted business activity, the effects of which are still being felt today.