Prime Minister Narendra Modi’s government unveiled a pre-election India budget that cut personal income taxes to boost consumption while ramping up infrastructure spending to spur growth in an economy touted as a “bright star” amid a gloomy global outlook.
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Prime Minister Narendra Modi’s government unveiled a pre-election India budget that cut personal income taxes to boost consumption while ramping up infrastructure spending to spur growth in an economy touted as a “bright star” amid a gloomy global outlook.
A 45-trillion-rupee ($550 billion) spending plan presented by Finance Minister Nirmala Sitharaman in New Delhi Wednesday seeks to do all that while still narrowing the budget gap to 5.9% of gross domestic product in the fiscal year starting April from 6.4% of GDP this year.
The government set a target to increase tax collection by nearly 12% to 23.6 trillion rupees next fiscal year, and borrow a record 15.4 trillion rupees to fund the budget. Benchmark 10-year bond yields erased earlier gains to fall as much as 6 basis points after the debt plan came in lower than the 15.8 trillion rupees expected in a Bloomberg survey.
By lowering taxes and still looking to rein in the budget shortfall, Modi is aiming to win over voters ahead of a national election next year, as well as ratings companies that would like to see government debt levels come down as a precondition for upgrading the nation’s credit score.
The narrower deficit forecast “underscores the government’s commitment to longer-term fiscal sustainability,” said Christian de Guzman, senior vice president at Moody’s Investors Service that rates India at the lowest investment grade. “Although changes to the tax regime will forego some tax revenue, the budget predicts largely buoyant revenue on the back of strong nominal GDP growth.”
Sitharaman’s ministry Tuesday forecast India’s GDP to grow 6.5% next fiscal year, higher than the 6.1% penciled in by the International Monetary Fund, and enough to sustain its spot as the fastest-growing major economy even as the pace is poised to slow from an estimated 7% expansion in the current year.
She proposed raising capital spending by more than a third to 10 trillion rupees, and said the government has identified 100 new projects for last mile connectivity. India also plans 50 additional airports, heliports and aerodromes, Sitharaman said, listing projects that are key to creating more jobs in the nation of 1.4 billion people.
Increased employment will help boost incomes, and in turn consumption — the backbone of the economy. That will prompt businesses to invest even more at a time when some advanced economies face recession risks and higher interest rates temper demand.
What Bloomberg Economics Says…
“Modi’s team delivered a pro-growth budget that also does a lot of belt-tightening. Cuts in personal income taxes and an eye-catching $10 trillion rupees allocated to public infrastructure will generate domestic demand”
—Abhishek Gupta, senior India economist
For the full note, click here
“The budget takes the lead once again to ramp up the virtuous cycle of investments,” Sitharaman said. Capital expenditure “is being increased steeply for a third year in a row,” she added.
Modi government’s budget also sought to leave more money in the hands of the people, by rejigging tax rates including exempting income up to 700,000 rupees from tax versus the earlier threshold of 500,000 rupees. While the measures would mean forgoing 350 billion rupees in revenue, the government eventually seeks to phase out the regime that allows tax exemptions and rebates on certain spending.
“This could have a consumption multiplier effect, albeit at the margin, in the economy that’s seeing fading consumption growth,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
The budget also comes as Modi takes the global stage with India’s presidency of the Group of 20 nations as he pushes an ambition to turn the nation into the world’s third-largest economy before the end of the decade. The G20 presidency gives India a unique opportunity to strengthen the nation’s role on global stage, Sitharaman said.
“Our vision for the ‘Amrit Kaal’ includes technology driven and knowledge based economy with strong public finances and a robust financial sector,” she said, referring to the next 25 years leading to India’s 100 years of independence, which the government touts as the golden era. “The Indian economy is on the right track,” she said.
–With assistance from Anup Roy, Shruti Mahajan, Muneeza Naqvi, Pradeep Kurup, Devidutta Tripathy, Sankalp Phartiyal, Jeanette Rodrigues, Saket Sundria, Eltaf Najafizada, Bibhudatta Pradhan, Vrishti Beniwal, Rajesh Kumar Singh, Rakesh Sharma, Ragini Saxena, Sudhi Ranjan Sen, Adrija Chatterjee, Pratik Parija, Ronojoy Mazumdar, Kartik Goyal and Menaka Doshi.
(Updates with details throughout.)
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