The Indian economy suffers from sluggish demand conditions and if the situation persists, the government may have to use fiscal stimulus and ‘redistribution’ politics to retain the popular mandate, says a report.
According to the report by Kotak Institutional Equities, despite the progress on executive and legislative reforms implemented by the government, consumption and investment still remain “sluggish”.
“We are hopeful about further economic recovery in the second half of this fiscal (FY17) on the back of a normal monsoon and 7th Pay Commission-related payouts.
“If demand conditions remain sluggish, the government may have to use fiscal stimulus and ‘redistribution’ politics to retain the popular mandate,” the report said.
However, this may not be received well by the market given India already runs a large fiscal deficit and such a policy may weaken the hard-won macroeconomic stability, it added.
The report further noted that populist measures are likely to get more traction in the coming days amid rising discontent of large sections of population with the global economic and political order.
“The rise of the extreme left and right parties in continental Europe and the UK and large popularity of populist presidential candidates in the US highlight the increasing disgruntlement of a section of the working population with the ‘established’ world order and mistrust of the ‘established’ political system,” the report said.
“The rising discontent of large sections of population with the global economic and political order may result in the political leadership adopting more populist policies. This could be more visible in trade and taxation,” it said.