India remains a land of missed opportunities. When Prime Minister Narendra Modi came into office in 2014, he raised hopes that he would reform administration, fix regulations, super-charge the economy and reinvigorate private investment. One can debate how much he’s accomplished on those fronts. But his record on one issue—fiscal restraint—had seemed impeccable. Helped by low crude oil prices, which meant the government could raise fuel taxes without political blowback, his administration largely maintained a deficit-reduction path set by its predecessor.

On Thursday, when finance minister Arun Jaitley presented the government’s annual budget—which in India is usually the year’s main economic policy statement as well—the government abandoned that commitment to fiscal consolidation. The ongoing financial year’s fiscal deficit was revised upward to 3.5% of gross domestic product (GDP) and next year’s target was changed to 3.3% of GDP from 3%.

Bond markets responded immediately. Yields on India’s 10-year government security shot up 18 basis points after the budget was presented. Reflecting a growing lack of confidence in India’s macroeconomic trajectory, sovereign bond yields have risen every month of the past six — the longest such streak since 2000.

Not content with stoking a bond rout, the budget also depressed equity investors: It reintroduced a tax on long-term capital gains, targeted at those who have held stocks for longer than a year and seen them appreciate. The timing was odd: The Indian middle class, turned off by low returns in other asset classes like gold or real estate, has been piling into equities recently. Nobody’s terribly pleased that the taxman is likely to stifle this enthusiasm.

The fact is that Modi may no longer have the luxury of caring about bond markets, or the opinions of institutional investors or even applause at Davos. India’s countryside appears to be turning against the globe-trotting prime minister: Rural incomes have not risen since he took office according to the government’s own annual economic survey.

On the same day that the budget was being presented, Modi’s Bharatiya Janata Party (BJP) was losing big in parliamentary by-elections in the northwestern state of Rajasthan; in one of the seats, the swing against the BJP was a massive 18%. If that’s even partially replicated across Modi’s strongholds in north and west India in general elections next year, then he’s quite likely to lose his parliamentary majority.

In response, Modi and Jaitley have taken a sharp turn towards populism. Income taxes on the rich were increased in the budget; capital gains were taxed; there was a five-fold increase in the amount of money assigned to India’s newly powerful taxmen. Meanwhile, the first 40 or so minutes of Jaitley’s budget speech were devoted to various schemes to improve the lot of India’s farmers—most of which are unlikely to work.

The government also announced what it said would be the world’s largest publicly subsidized health insurance program—without any details on how it would control costs and without any allocation of funds in the budget. The budget arithmetic was questionable on various other grounds, too. Some analysts calculated that, taking cash in hand into account, the fiscal deficit this year was actually over 3.7% of GDP. Add the bonds that the government intends to issue to recapitalize stressed public sector banks and it goes up even further. Is it any surprise that bond markets are spooked?

Buried in the fine print of the budget—and barely mentioned by the finance minister in his speech — was an even more momentous change. For the first time in a generation, India is becoming less open. For decades, in budget after budget, Indian governments have lowered the country’s once-formidable tariff barriers. On Thursday, Jaitley sharply raised an entire swathe of customs duties on products as disparate as silk, iPhones, kites, televisions, shoes and Ikea furniture. The reason was straight out of the 1980s: unabashed protection of local industry. The move was especially jarring after Modi, just a fortnight ago in Davos, had declared that protectionism was as great a threat as terrorism or climate change.

It’s almost painful to remember the hopes that many cherished when Modi was elected. Now the fiscal math is muddled, bond yields are spiking, the central bank might have to raise rates in response and India is turning protectionist. New project announcements in the last quarter were the lowest they’ve been in 13 years. This poor country can’t seem to catch a break. Bloomberg

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