A series of political developments over the last few weeks has placed the Bharatiya Janata Party (BJP) on the back foot and an early general election in the fourth quarter of 2018 cannot be ruled out, according to global financial major Nomura.
In its latest ‘Asia Insights’ report, the Tokya-based financial services firm says that while the Centre may not breach its 2018-19 fiscal deficit target of 3.3% of gross domestic product, greater capital requirements for bank recapitalisation and State-level farm loan waivers could lead to increased debt burden and a higher general government (Centre and States combined) fiscal deficit.
‘Populist overtone’
“From an economic perspective, this suggests that big-ticket reforms are less likely and a populist overtone is more likely as the government raises its pro-farmer, pro-common man profile via higher minimum support prices (MSPs) and fiscal transfers that ensure that MSPs are effective, increasing both inflation and fiscal risks,” Nomura said.
“We were leaning towards the view that concerns over the current account deficit, fiscal slippage and rising inflation were beginning to be priced in, but the risks around politics have turned less favourable for markets after the by-election losses in Uttar Pradesh,” it added.
Interestingly, Nomura is of the view that there is a 25% probability of an early general election, clubbed with State elections scheduled in the fourth quarter of 2018 and the first half of 2019. Rajasthan, Chhattisgarh and Madhya Pradesh will go to the polls in that period.
The financial major opines that the political developments are proving to be irritants for the BJP-led central government due to which big-ticket reforms would be difficult. The focus was instead likely to turn towards implementation along with restrained populism, Nomura added.
