(Bloomberg) — India’s finance minister slashed taxes for individuals and widened budget deficit targets for the current and next fiscal years to help spur a slowing economy.
The government will miss its deficit goals for a third year, pushing the shortfall to 3.8% of gross domestic product from a planned 3.3% in the year ending March, Finance Minister Nirmala Sitharaman said in Parliament in New Delhi Saturday. The deficit target for the coming fiscal year starting April 1 was widened to 3.5%.
Personal income tax rates for individuals were lowered as part of a goal to lift consumption in an economy that’s set to grow 5% this fiscal year, the weakest pace in more than a decade.
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“This is a budget to boost incomes and enhance purchasing power,” Sitharaman said at the beginning of a speech that lasted more than two and a half hours.
Tax cuts for individuals, outlined below, will cost the government 400 billion rupees ($5.6 billion) in revenue, she said:
The minister’s top adviser on Friday urged her to relax the deficit goal for the current year, saying reviving economic growth was an “urgent priority.” The adviser’s Economic Survey, a report that Sitharaman presented to lawmakers on Friday, estimates growth will rebound to 6%-6.5% in the year starting April.
Sitharaman used a provision in fiscal laws to enable the government to breach a mandated goal to bring the deficit down to 3% of GDP by the year ending March 2021.
Economists were muted in their reaction, saying the steps announced won’t be a sufficient boost for the economy.
“Overall, we see the budget as largely neutral for short-term growth,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. in Singapore.
The deficit will be funded by a record market borrowing of 7.8 trillion rupees in the coming year. The government also plans to give foreign investors greater access to the nation’s debt, a move seen as a precursor to getting its securities included in global bond indexes.
Stocks Slump
India’s benchmark S&P BSE Sensex stocks index extended its decline to as much as 1.9% in Mumbai Saturday after Sitharaman proposed levying a dividend distribution tax on investors instead of companies, and announced abolishing some tax exemptions. The bonds and currency markets were shut.
“It is not a full-frontal fiscal stimulus that the markets were hoping for,” said Rini Sen, an economist at Australia & New Zealand Banking Group Ltd. in Bengaluru
Moody’s Investors Service said the budget highlights the challenges to fiscal consolidation. India’s government debt is already “significantly higher” than the average for its Baa-rated peers, said Gene Fang, associate managing director of sovereign risk.
“Sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve,” he said. “The government also has limited room to reduce expenditures without further weakening growth.”
Sitharaman said the budget was based around three main themes: an “aspirational India, economic development for all and a caring society.”
Here are some other highlights of her speech:
Markets: Abolishing dividend distribution tax for companies will entail a revenue loss of 250 billion rupeesFinancial sector: The government will sell its stake in IDBI Bank Ltd. and list state-owned Life Insurance Corp. of India on the stock exchangeExcise duties: Tax on cigarettes and other tobacco products to be increasedRural: Farm, rural sectors to be allocated 2.83 trillion rupees in the budget; agriculture credit target for next year set at 15 trillion rupeesInfrastructure: Transport infrastructure to be allocated 1.7 trillion rupees; a sum of 3.6 trillion rupees earmarked for piped water projects; power, renewable energy sector to get 220 billion rupeesEducation: 993 billion rupees allocated to sector; foreign investment will be allowed in education as well as overseas borrowing by institutionsInvestment: A program proposed to encourage the making of mobile phones, medical devices; proposal to allow private sector to build data center parks
“The budget is an acknowledgment that the fiscal isn’t looking good,” Ananth Narayan, a senior India analyst at Observatory Group told BloombergQuint. “The fiscal space for doing something big wasn’t there.”
Bloomberg.com
