Modi Opts for Policy Stability With Familiar Faces in Cabinet

(Bloomberg) -- India’s Prime Minister Narendra Modi retained several cabinet ministers in key portfolios, including finance, signaling policy continuity in a new coalition government in charge of the world’s fastest-growing major economy.

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Nirmala Sitharaman was reappointed India’s finance minister, a position she’s held since 2019, the government said Monday. Home Affairs Minister Amit Shah, External Affairs Minister Subrahmanyam Jaishankar, Commerce Minister Piyush Goyal and Transport Minister Nitin Gadkari all kept their posts.

The cabinet appointments follow several days of intense negotiations between Modi’s Bharatiya Janata Party and its coalition partners, who the BJP is now forced to share power with after losing its outright majority in recent elections. Modi was sworn in to office for a third consecutive term on Sunday, allowing him to continue pursuing his ambitious economic agenda.

However, the disappointment at the polls suggest his government will need to do more to tackle unemployment, especially among the youth, rising living costs and widening inequality.

Economists said the reappointment of key ministers helps to ease market concerns around the new coalition government, particularly around fiscal policy. Modi’s government had pledged to curb the fiscal deficit to 4.5% of gross domestic product by next year, but the BJP’s below-par performance at the polls has raised fears officials may ramp up spending to shore up voter support, putting budget targets at risk. The BJP will face a series of crucial state elections in coming months including in Maharashtra, Haryana and Delhi.

Sitharaman is “a prudent fiscal manager,” said Abheek Barua, chief economist at HDFC Bank, adding that the minister will ensure India remains on the path of fiscal consolidation. “We can see more allocation towards rural development and rural housing, and she will ensure that it does not translate into any fiscal slippage. It’s very critical at this moment.”

The minister’s immediate task will be to present the government’s budget, likely in July, which will provide insight into the Modi coalition’s priorities going forward. A boost to government coffers recently means there’s fiscal space to spend more. Tax revenue has soared and the central bank recently announced it will pay a record dividend of about $25 billion to the government.

There are no plans to raise the fiscal deficit target from 5.1% of GDP for the current year, Reuters reported, citing an unidentified government official.

S&P Global Ratings recently signaled a possible credit rating upgrade in coming months, citing the improved fiscal position.

“The decision to retain key cabinet ministers in the important portfolios of finance, home, defense, external affairs, road transport, in the third term sends a strong signal of policy continuity,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc.

Some of the new faces in the cabinet include Shivraj Singh Chouhan, the former chief minister of Madhya Pradesh state, who was appointed agriculture minister, and J.P. Nadda, the BJP president, who was named health minister. Of the 30 cabinet positions, 25 stayed with the BJP and five went to the allied parties.

Economists expect the BJP-led government to continue its focus on infrastructure spending, which has helped underpin rapid economic growth. India’s economy expanded more than 8% in the fiscal year that ended in March, with the central bank predicting growth will reach 7.2% in the current fiscal year.

“We expect the new government to stick to the fiscal consolidation path with a continued thrust on infrastructure creation through more rail network, amidst a slight tilt towards more rural spending,” Goldman Sachs Group Inc. economists including Santanu Sengupta wrote in a note.

--With assistance from Shruti Srivastava, Abhijit Roy Chowdhury, Santosh Kumar, Abhishek Vishnoi and Chiranjivi Chakraborty.

(Updates with media report on fiscal deficit.)

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