Finance Minister Arun Jaitley announced increases in spending on rural areas, infrastructure and fighting poverty, and sought to assure lawmakers and the country that the economic impact of the government’s cash crackdown would wear off soon.
Jaitley also halved the basic personal income tax rate, and cut taxes on small firms that account for 96% of India’s businesses, while imposing a surcharge on the better off.
“It’s an election budget, to all intents and purposes, with a massive push on rural spending and some quite big tax cuts,” said Shilan Shah, India economist at Capital Economics in Singapore. The budget sops come days before India holds five regional elections that will go some way in determining whether Modi can win a second term as leader in 2019.
“This budget is yet again devoted to the well-being of villages, farmers and the poor,” Modi said in a national TV address soon after Jaitley delivered his two-hour budget speech.
As economists polled by Reuters had expected, Jaitley raised the target for the federal fiscal deficit to 3.2% of gross domestic product in 2017-18 — effectively postponing the goal of bringing it down to 3%.
Economists, however, said that the sheer scale of the government’s promises on tax cuts and spending increases cast Jaitley’s higher deficit goal into doubt.
Balancing the books will depend on him hitting his target to sell Rs725bn ($10.7bn) of state assets — or nearly 60% more than the expected proceeds this year.
“Jaitley is leaving room to exceed it at a later time,” said Varun Khandelwal, managing director at Bullero Capital in New Delhi.
The finance ministry estimated that the deficit will come in at 3.5% this year, in line with target. While calling India “an engine of global growth”, Jaitley highlighted risks from likely US interest rate hikes, rising oil prices and worries of growing global protectionism.
Modi’s shock decision in November to scrap high-value banknotes worth 86% of India’s cash in circulation has hit consumers, disrupted supply chains and hurt investment.
The worst of the cash crunch is now over, however, and Jaitley said he expected it would not spill over into the next fiscal year.
Still, the finance ministry forecasts growth could dip as low as 6.5% this fiscal year before picking up to between 6.75% and 7.5% in 2017-18.
That is below the target rate of 8% or more that Modi needs to create enough jobs for the 1mn young Indians who enter the workforce each month. While opinions vary on how long the disruptions caused by the crackdown on untaxed and illicit wealth will last, most analysts say Asia’s third-largest economy needs a helping hand.
Jaitley hiked capital investment by 25.4%, and announced a 24% increase in rural and farm spending.
Health spending will rise by 28% — as reported by Reuters earlier this week. But there was no extra room to increase support for the troubled state banks. Jaitley said he would pump in Rs100bn ($1.5bn), in line with earlier plans.
On the tax side, Jaitley’s standout announcements were the halving of the lowest rate of personal tax to 5% that applies on incomes between Rs250,000 and Rs500,000. Better-off taxpayers will pay a 10% surcharge.
Small businesses with turnover up to Rs500mn a year will see their tax rate cut to 25% from 30%. Taken together, the cuts in direct taxes would cost the public purse close to $3bn.
In a surprise move, Jaitley said the government would abolish the Foreign Investment Promotion Board, in a move to cut a layer of bureaucracy and make India an easier place to do business.
“Abolishing the FIPB will further boost foreign direct investment,” said Pravin Kumar Agrawal, a tax partner at Deloitte Haskins & Sells.
Jaitley also announced a tightening of rules governing the funding of political parties, which are notorious for relying on undeclared donations to cover the vast expense of campaigning in the world’s largest democracy.
This included slashing the maximum cash donation to Rs2,000 and requiring parties to file income tax returns.
