Modi's policies have had a crucial bearing on the fiscal stance of the states. Welfarism is bloating state budgets. Our analysis shows that the quality of the spending mix is deteriorating at both the country and state government levels. More money is going on salaries, interest costs and other non-productive spending.
The recent fiscal target misses as well as Modi's increased tilt towards welfare spending imply a pause - if not reversal - in the fiscal consolidation efforts of the first few years of his government. With political headwinds rising ahead of national elections in 2019, it appears likely that both central and state governments will miss their FY19 targets.
Since we published this warning further fiscal deterioration has occurred. More states have announced farm loan waivers, the central government (as well as some states) cut the excise duty on fuel products, and the central government has already exceeded its fiscal deficit target. Given that tax revenues are below target and the government has so far only achieved half of its disinvestment target, a slippage in its full FY target is highly likely.