In a recent interview, Indian Prime Minister Narendra Modi said: “I never make my timetable on the basis of the election timetable.” Whatever his claims, the events leading up to the Gujarat State Assembly elections last December suggested that his priorities are largely driven by electoral considerations.

There are clear signs of rural disenchantment with the ruling Bharatiya Janata Party (BJP) and there are a string of elections due this year and next. Hence the budget for the 2018-19 fiscal year, announced on Thursday, kept a strong rural focus with projects and handouts directed at agriculturists.

The Gujarat factor

The western state of Gujarat contributes 26 members, roughly 5% of the total, to the directly elected lower house of India’s Parliament, the Lok Sabha, which has 543 seats. All 26 Gujarat members of Parliament belong to the BJP, and Modi was the three-term chief minister of Gujarat before he led the BJP to victory in the 2014 general elections. The reverses the BJP faced in Gujarat in December could threaten its position in the national Parliament in 2019. This is true for all the parliamentary seats the BJP swept up in 2014.

The winter session of Parliament was postponed by a month in order to allow the prime minister and 30 of his cabinet colleagues to crisscross Gujarat for weeks in a high-intensity state election campaign. The BJP retained a majority, taking 99 seats in the 182-member Gujarat Assembly. But that was fewer than the 115 seats it had held in the previous assembly. The reverses came in rural areas, where the BJP won just 53 of 127 rural and semi-urban seats.

The current Lok Sabha is scheduled to be dissolved by May 2019. So the BJP, which holds a majority of 282 seats in this Lok Sabha, must start thinking about re-election. Multiple state assembly elections are scheduled before that general election.

Polls are scheduled for Karnataka state, currently ruled by the Indian National Congress party, and for the BJP-ruled states of Rajasthan, Madhya Pradesh and Chhattisgarh. Karnataka is an information-technology powerhouse, but with an agrarian sector that has suffered distress. The other states are predominantly rural.

The northeastern states of Nagaland, Meghalaya, Tripura and Mizoram are also due to go to the hustings. None of these states are BJP-ruled and Modi has already started campaigning in the Northeast region, addressing rallies and announcing projects.

Rural distress

Given the BJP’s focus on winning elections, mollifying the rural electorate was a major theme in the budget for fiscal year 2018-19 (April 2018 to March 2019). The budget encouraged the faster roll-out of rural infrastructures such as roads, power networks and telecom networks.

A rural thrust could also mean expanded allocations for the MGNREGA, (Mahatma Gandhi National Rural Employment Guarantee Act), a program that offers financial assistance and job opportunities for unemployed rural labor. This scheme was allocated 480 billion rupees (US$7.5 billion) in the 2017-18 fiscal.

The budget may also reduce tax imposts on fertilizers, tractors, tillers, and other farm equipment and offer more tax breaks for mortgages in the so-called “affordable housing” segment, which addresses the semi-rural market.

Demonetization and GST

Apart from a rural focus, there are two major tasks that the government must attempt if India is to maintain its fiscal health. One is the stabilization of the banking system, which requires massive recapitalization; the second is the stabilization of the GST (goods and services tax) system.

The government has committed to a complicated bank recapitalization, which envisages 2.2 trillion rupees being pumped into government-owned banks. It has just released a schedule for the allocation of the first 880 billion rupees.

Even more may be required. The latest estimates from the Reserve Bank of India’s Financial Stability Report suggest that non-performing assets (bad loans, in other words) will hit 11% of total banking assets by September 2018. The growing non-performing-assets burden has affected private banks as well.

The GST, which is critical to indirect tax collections, was introduced last July. It is still experiencing teething troubles. There have been extensive changes to GST processes since the July 1 roll-out. The tax on 200-odd items has been reduced. Tax collections have been below expectations. Low GST collections mean a larger fiscal deficit.

The budgeted target of holding the fiscal deficit to 3.2% of gross domestic product in 2017-18 will be missed. The government is already committed to borrowing at least 200 billion rupees more than it initially targeted, and the fiscal deficit could hit 3.5% of GDP or even go higher. The fear is that lower tax collections plus expanded rural spending could push up the fiscal deficit for 2018-19 as well.

GDP growth is expected to accelerate as the toxic effects of demonetization dissipate. However, growth remains weak for now and consumption is subdued. This year (2017-18) is likely to see GDP growing at between 6.5-6.7% by most estimates, which is well below earlier expectations of growth at 7.2% or higher. Next year (2018-19), optimists hope that growth will rebound to 8%.

This is the last budget before the BJP seeks re-election, and Modi is acutely sensitive to shifts in the political narrative. It is quite likely that he will formulate some new “black swan” strategy, akin to the shock demonetization, to try to recover some moral high ground. At least, that’s the buzz on the gossip circuit in Delhi. So there could be a surprise element in the budget.