Budget 2018: This could be the best time for Modi to honour fiscal pledges

Budget 2018-2019

With elections in sight, India's government is under pressure to loosen fiscal policy in its budget on Thursday. Tempting as this may seem, it would be a mistake.

Chief economic adviser Arvind Subramanian has made the most candid argument for relaxing the country's tough fiscal stance: Given the political calendar, promises to honor the targets simply wouldn't be believed. He has a point -- but the answer is to do a better job of explaining why the targets make sense.

The Indian economy was jolted by the overnight withdrawal of high-value currency notes in November 2016 and last July's introduction of a complicated goods-and-services tax. Plummeting crop prices have caused widespread distress in the rural areas where most Indians live. Facing upcoming state polls, as well as another general election in 2019, Prime Minister Narendra Modi is expected to loosen the purse strings. Indeed, many investors seem to want him to, because they'd like to see him reelected.

Nonetheless, the government ought to stick to its goal of reducing the deficit to 3 percent of the gross domestic product next year. The target for this financial year is likely to be exceeded regardless. Overshooting it again would dent the hard-won confidence that earned India its first debt-ratings upgrade in years last November.

The most recent fiscal numbers have already contributed to a rout in sovereign bonds - lately the worst-performing in Asia. Benchmark 10-year yields rose again after Subramanian's comments and are up almost 40 basis points since the beginning of December. A budget that raises the cost of borrowing any further will undercut any benefit that additional public spending might bring.