Modi is entering final stretch of his five-year term as PM

India's Government Will Soon Loosen Purse Strings: Deutsche Bank

EghtesadOnline: History suggests India’s government is about to embark on a spending spree.

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03 May 2017

A Deutsche Bank analysis shows government spending picks up in the last two years of an Indian government’s five-year term. That’s exactly where Prime Minister Narendra Modi’s administration is right now, with three years behind him as of May and a general election due in 2019.

The uptick makes sense. Like other democracies, Indian politicians want to show voters the government is doing its part to create jobs and boost growth by spending on infrastructure projects. With India’s anemic job growth one of the biggest political risks in the world’s fastest growing major economy, Modi will certainly want to quicken the pace of job creation before he faces voters, according to Bloomberg.

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

Laijawala estimated in an April 26 note that year-over-year government expenditure increased 12.1 percent in the last two years of the Congress government in the 1990s, and 14 percent for the Bharatiya Janata Party government in the early 2000s.

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

Indian political parties can get populist in the run up to elections, promising to write off farmer loans, as Modi’s BJP did in the state of Uttar Pradesh recently. But the country’s national government is too conscious of its credit rating to go overboard, Laijawala said. The government is "extremely cognizant of the way the world sees them," he said, and won’t stray from its fiscal deficit target.

In terms of winners and losers, the spending spree could benefit companies in materials such as cement, industrials, utilities and IT services, Laijawala said in his note.

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

If Modi tackles India’s bad loan problem -- and tweaks legislation to enable bureaucrats to approve projects without fear of being caught up in corruption -- then private sector capital expenditures could increase, as well, Laijawala said.

However, India’s implementation of a nation-wide GST starting in July could cause some near-term economic disruption, he added.