The narrower-than-expected win in Gujarat and upcoming polls in other states will lead to a reorientation of priorities for the government with a greater focus expected on the farm and small businesses sectors, the head of a domestic rating agency has said.
However, the increased spends which it may entail will have repercussions on fiscal deficit and the government may go for relaxed targets in the upcoming budget, Icra's managing director and chief executive Naresh Takkar told recently.
"Gujarat was surprisingly difficult. The kind of hold which the PM and the BJP have over Gujarat, they may like to interpret the results more deeply," he said.
"They still have 18 months, so the government should be in a position to re-orient its priorities. It is committed on reviving the economy and reforms, but the political outlook, (of) which they will have a better understanding now, they would re-balance their priorities," he added.
It will focus more on the rural sector and small businesses, Takkar said, adding that the Gujarat verdict and upcoming polls will have a "significant" impact on the economic policymaking in the near future.
The government will realign its priorities and with a desire to see early results, start spending as well, he said.
Takkar, however, was quick to warn of the difficulties on the fiscal math as a result of such extra focus. The private sector capex is also unlikely to come for the next six quarters, he said.
"There is going to be a pressure. They may start looking at fiscal (deficit) not as a hard-coded number but have some kind of a band within which they would like to operate rather than sticking to a headline number," he said.
It can be noted that the government has already exhausted 112 per cent of the fiscal deficit target for 2017-18, where it is targeting a fiscal deficit of 3.2 per cent.
Under the medium-term roadmap, it is to narrow the same to 3 per cent for FY19 and all eyes are on Finance Minister Arun Jaitely's February 1 budget, for the stance he adopts.
On the rural side, the government may look at upping the minimum support prices or some loan waivers, while on the small businesses front, it will have to start fixing concerns on the GST and operation of schemes like Mudra.
He also warned that the spending may have some inflationary impact, and the rising commodity and oil prices will only aggravate the issue.
Because of such policies, Thakkar said, they should expect a prolonged pause from the Reserve Bank in its rates stance and there will not be any softening in lending rates.
"Let us see how the government manages its fiscal position. But softening is clearly ruled out in the near term and I could only expect hardening going forward," he said.
The government will also have to fund the urban infrastructure needs, he said.
Thakkar said the private capex will take time to revive but it will be of good quality than the previous one where banks funded leveraged borrowers, with lower non-performing assets and hence, more durable.
The NPAs are near the peak and will be coming down over time, he said, adding that banks will also deploy their learnings for better book management.