PM Modi's Dilemma As Government Presents Union Budget Tomorrow

Story HighlightsFinance Minister Arun Jaitley will present annual budget on February 1Thursday's budget will be last full budget before elections in 2019HSBC expects government to miss fiscal deficit target of 3.2% for 2017-18

Prime Minister Narendra Modi has a tough balancing act in tomorrow's budget: maintaining fiscal prudence or handing out sops to placate rural voters ahead of next year's election.

After scoring a rare sovereign upgrade late last year, PM Modi wants to keep global investors and credit-rating companies on his side. Key to that will be sticking to his goal to narrow one of Asia's largest budget deficits.

Bond investors have already concluded that Finance Minister Arun Jaitley will deviate from those plans when he delivers his budget on Thursday, with yields climbing 96 basis points in the past six months, the most in Asia. In the last full budget before the elections, Mr Jaitley needs a growth boost for an economy that's slowing down to a four-year low, while appeasing angry young voters, who contributed to the ruling party's worst performance in PM Modi's home state in more than two decades in December.