Populist schemes ‘to push up deficit’

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 titled ‘Coalition blues: After India’s 2019 Elections’, said 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% 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 economists 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 to bring it under check either due to election related compulsions or 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% 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% in fiscal 2019 and target is again higher at 3.4% in fiscal 2020 as well.