While Indian stocks paused after a 40% jump over the past year on Finance Minister Arun Jaitley’s new budget presentation ahead of 2019 elections, particularly on the planned resumption of a 10% long-term capital-gains tax eliminated a decade ago, the bond market reeled over the acknowledged worsening of India’s fiscal deficit and uncertainty over the cost of a banking-sector cleanup.

The business and financial communities found scant cheer in Budget 2018, which was designed to appeal to rural voters and small traders with ambitious incentive and spending packages as Prime Minister Narendra Modi absorbed the economic and political lessons of hasty big-banknote demonetization and unified national tax initiatives. They dented confidence and popularity, as reflected in the ruling party’s narrow victory in recent assembly elections in his home state of Gujarat.

Quarterly growth in gross domestic product dipped to 5% after the recent measures, although the final annualized number for 2017 should come in over 6.5%, and next fiscal year the International Monetary Fund forecasts world-beating growth of 7.5%, above even China’s pace.

The Power Ministry predicted even faster 8.5% expansion based on its demand and supply picture, as the Commerce and Industry Ministry formed a working group to double output over the next decade to US$5 trillion.

‘Modicare,’ bank recapitalization

Health services and insurance could take off after the budget proposed “Modicare,” offering the equivalent of $8,000 in health-care coverage for 100 million poor families, but the government may not be able to afford these goals as the deficit will again breach the original target of 3.2% of GDP through March and likely stray further as the 2019 general election approaches.

The consolidated fiscal hole could be triple that level as states and municipalities issuing their own bonds increasingly run into trouble, with many already calling on New Delhi for help.

Public-sector banks in turn received $1 billion in appropriations for recapitalization, with additional billions to be financed by special bonds as foreign investors have exhausted their allocation quota, and domestic counterparts worry about the looming supply pipeline, with stubborn 5% consumer inflation also pressuring interest rates.

Moody’s Ratings was relatively unmoved by Jaitley’s laundry list of changes, described as a “prudent balance despite spending uncertainty.” It cited “shallower” fiscal consolidation with a farm-subsidy increase and teething pains with the new goods and services tax system.

The rating agency pointed out that to achieve central-government debt reduction from the current 50% of GDP, a rebound in private investment will be required, a still-absent linchpin of the Modi economic agenda.

Moody’s implied that a cut in small-business income tax from 30% to 25% could apply more generally, and cautioned about loosening domestic bank and institutional investor guidelines for lower-rated debt, although funding will aid infrastructure development.

The Indian central bank has kept the benchmark repo rate at 6% despite inflation notice and the global tightening cycle, and the stronger rupee on heavy foreign-portfolio inflows has been a safety valve despite the chronic current-account gap of 2% of GDP.

Indian government securities have been top emerging-market picks according to regular fixed-income surveys by the New York-based Emerging Markets Traders Association (EMTA), and post-budget retrenchment could drain liquidity and spike infrastructure-project expense with the limited domestic savings base.

Former Reserve Bank of India chief Raghuram Rajan addressed the risk of such concerns in a speech at the World Economic Forum session in Davos, Switzerland, in January, but also accused the bureaucracy of impeding building applications and the Modi team of micro-managing decisions.

At the WEF gathering, Indian business executives expressed fears that commercial construction was at a standstill, such as in residential real estate, where recent officially imposed sales rules to pre-empt abuses have further frozen the market after the previous “black money” demonetization sweep.

With the reinstated capital-gains levy, a portion of last year’s $20 billion in domestic equity mutual fund inflows could be diverted to exempt bonds, but investors will remain wary pending clarification of the more than $30 billion state-bank fundraising program.

Half that sum will be injected by March into the 20 lenders, accounting for 70% of system assets and the bulk of the $130 billion bad-credit total, provided they clear other hurdles including management and governance changes and debt workouts of the 40 largest corporate defaulters.

As with headline fiscal targets, these sector milestones will likely too be diluted as they await a convincing “Modicare” formula into a possible second term for the Modi administration.