Govt must limit populist spending before 2019 polls to adhere to fiscal deficit targets: UBS report

Mumbai: Swiss brokerage UBS on Tuesday said the Centre should stay away from populist spending ahead of the 2019 general elections to adhere to fiscal deficit targets.

“The government needs to keep a lid on fiscal pending, which could be tricky in the run-up to the 2019 elections,” it said in a report.

Concerns on GST collections, states’ rising fiscal deficit and the risk of populist spending ahead of 2019 is keeping the markets on “tenterhooks” about a possible fiscal slippage, the report added.

It can be noted that last week, Prime Minister Narendra Modi had affirmed his administration’s commitment to meet the fiscal gap targets this year as well.

The note from the brokerage comes amid reports of the government discussing a hike in minimum support prices (MSP) for grains in line with the announcement of delivering 150 percent of the costs as returns for farmers.

It also pitched for not pursuing easy monetary and fiscal policies due to the tightening of financial conditions globally.

“We believe a rate hike now will avoid the risk of steeper tightening in future,” UBS said, adding that it expects another 0.25 percent hike in key policy rates in FY19 and possibly in the August monetary policy review itself.

However, the brokerage said the risk of the rate hikes totalling to one percentage point as against the 0.50 percent base case assumption (a hike in June and August each) are “alive” on factors like the crude price hikes and the strengthening of the dollar.

The tightening in the external conditions and the strengthening of rupee has resulted in the rupee becoming one of the worst performing currencies within peers and hitting a new low, dip in portfolio inflows in both equity and debt, and tightening in domestic conditions which has resulted in the spread between short-term rates and repo rate being highest since 2013, it said.

The spreads being higher can have adverse implications on investment cycle recovery and hence the growth outlook, it warned. “We believe India is not immune, and if global financial conditions remain tight and/or global risk aversion rises from here, India will bear the brunt in the form of an adverse impact on growth and financial stability,” UBS said.

The brokerage said it had recently cut its GDP growth forecast to 7.3 percent for the fiscal year 2018-19 and expects it to go up to 7.5 percent in the year after.