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Budget sweeteners see India backtrack on financial discipline

By newadmin / Published on Thursday, 01 Feb 2018 13:15 PM / No Comments / 5 views

Prime minister Narendra Modi’s government has unveiled a pre-election budget aimed at placating hard-pressed rural voters and small businesspeople, as it backtracked on promises of greater fiscal discipline.

Presenting the administration’s final full-year budget before elections due in 2019, Arun Jaitley, finance minister, revealed a host of new spending plans and carefully targeted tax breaks aimed at voters hardest hit by two years of turbulence and slowing economic growth.

“This budget is farmer friendly, common citizen friendly, business environment friendly and development friendly,” Mr Modi declared. “It will add to the ease of living.” 

But the new promises will come at a cost. Mr Jaitley said the government was targeting a fiscal deficit of 3.3 per cent of gross domestic product for the financial year starting on April 1, backtracking on a promise made last year to reduce the fiscal deficit to 3 per cent of GDP.

Mr Jaitley also confirmed market expectations that New Delhi would overshoot this year’s deficit target of 3.2 per cent. He said the actual deficit was likely to come in at 3.5 per cent of GDP, as revenues were lower than expected in a year of radical tax reform.

It’s a democratic budget. But the signals on government deficits are not quite what they ought to be

Bond market investors had already anticipated such slippage, and yields had risen from 6.5 per cent in mid-November to 7.44 per cent in the run-up the budget.

While the budget offered tantalising promises to the common man, business leaders said it had little to boost sentiments of large businesses or revive private investment, which has remained flat through Mr Modi’s tenure.

“It’s a democratic budget. But the signals on government deficits are not quite what they ought to be,” said Gaurav Dalmia, chairman of Dalmia Group Holdings, a conglomerate. “There is nothing directly to instigate animal spirits and revive the capex cycle. If interest rates go up, it may actually act as a bit of a dampener.”

While Indian companies had hoped for a lowering of the corporate tax rate from 30 per cent, New Delhi said that only small businesses with revenues below $50m would get a break, with their rate lowered to 25 per cent.

India budget main points

  • Backtrack on previous fiscal deficit target 
  • New long-term capital gains tax
  • Corporate tax breaks for small and medium-sized enterprises
  • More spending for rural economy
  • Promise of new national health insurance scheme for poor

To raise new revenues — and protect Indian manufacturers — the government said it would increase customs duties on mobile phones from 15 to 20 per cent, dealing a blow to companies such as Apple that manufacture few products and components in the country. Customs duties were also raised on other imported consumer items.

The government also announced a new 10 per cent long-term capital gains tax on shares held for more than 12 months.

Among the government’s most dramatic promises is a new national health insurance scheme that would provide 100m poor families with up to Rs500,000 ($7,800) in coverage in case of hospitalisation for serious accidents or diseases.

At present, health emergencies are a major cause of impoverishment in Indian families, many of whom turn to high-interest moneylenders to avoid the country’s under-funded public hospitals.

But it remained unclear how the new scheme would be funded.

New Delhi has also promised to bolster farmers’ incomes by raising the minimum support price — the amount it pays for grains procured for public distribution — to 1.5 times the costs of production.

Siraj Chaudhry, chairman of Cargill India, part of the multinational agriculture group, said: “A lot of thought has gone into the government’s attempts to boost the rural economy, but most of them will not deliver results in the next 12-18 months.” 

Additional reporting by Kiran Stacey and Jyotsna Singh in New Delhi

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