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Karnataka election results could worsen government’s budget troubles

Narendra Modi’s loss of control in Karnataka could put pressure on the party to ramp up their spending in order to woo rural voters. This could push back their plans to rein in India. The government’s budget was already in trouble before the events in Karnataka unfolded. BJP failed to form a government in Karnataka.

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The fiscal target was breached in 2018 while the goal for the year also widened to 3.3 percent of gross domestic product. In addition, there is a surge in oil prices and the currency has slumped more than 6% against dollar. There is a pick-up in inflation which is also making India’s outlook gloomy. The election is another source of uncertainty. There is usually a risk of fiscal slippage in a year before the elections but the rise in oil prices is making it worse. There could be a budget gap of 3.5% of GDP this year.

Government bonds have also not performed well and they are fuelled by a wider budget target, global sell-off of the market assets and a faster inflation. The pressure due to election could prompt the government to cut the excise duties instead of raising the pump prices, thus pushing up deficit. The fiscal gap will increase with every increase in global oil prices.

Further, the country’s rural base is about 68 percent of the nation’s people. They form a key voter’s block in the largest democracy in the world. Modi has already promised to double the income of the farmers by 2022 and to increase the living standards of the villagers. BJP has faced still competition from the Congress in the last six months in Gujarat as well as in the by-elections in Uttar Pradesh, Bihar and Rajasthan. BJP won more votes in Karnataka but fell short of a majority. The Congress will form a government in Karnataka and will announce programs to appease the farmers.

A recent research by Reserve Bank of India showed that growth in rural income has been depleting in the last four years. This is due to the drought in 2015-15 and 2016-16. Additionally, the construction industry which was booming in 2000-2012 has also slowed down. Indian economists expect BJP to focus on uplifting the rural income and alleviating farm distress in the coming months. Authorities will have to keep the budget deficit under control while boosting the spending to farmers.

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