India unveiled a fire-fighting budget yesterday that seeks to win back support among rural voters for Prime Minister Narendra Modi’s government and sustain growth against a grim global backdrop - all without borrowing more.
Finance Minister Arun Jaitley’s third budget marked a strategic shift by addressing rural distress in a country of 1.3bn, where two-fifths of families rely on farming and are reeling from two years of drought.
At the same time it hiked public investment in India’s woeful infrastructure by 22.5%, while taking further steps to revive corporate investment that Modi needs to create new jobs for India’s burgeoning workforce.
“We have a shared responsibility to spend prudently and wisely for the people, especially for the poor and downtrodden,” the 63-year-old finance minister told lawmakers in his 100-minute address as he unveiled a Rs19.78 lakh crore ($300bn) budget, earmarking more money for health, literacy and roads.
The focus on rural economy and the promise to double the income of farmers in five years came against the backdrop of a distressed agrarian economy, fewer jobs and assembly elections in five states this and next year.
The direct impact on taxpayers from the proposals will be a Rs3,000 rebate, benefiting 20mn assesses. Those living in rented homes will get a higher exemption of Rs60,000 now, against Rs24,000 earlier. But the tax slabs remain unchanged.
At the same time, withdrawal of provident fund and pension upon retirement are partially taxable.
Jaitley also announced an amnesty for those with disputed tax claims, with a waiver of penalty on amounts up to Rs1mn.
India holds several state elections this year, including in the farming state of West Bengal, with the country’s most populous state, Uttar Pradesh, going to the polls in 2017. A strong showing will be vital to Modi’s chances of a second term.
Despite commanding a large majority in parliament’s lower house Lok Sabha, Modi’s government has failed to pass several key measures since sweeping to power almost two years ago, raising doubts over the impact of its reform agenda.
Jaitley called Asia’s third-largest economy a bright spot in a gloomy global landscape, and reiterated a forecast that it would grow by 7.6% in the fiscal year that is drawing to a close.
But, despite hefty commitments on rural welfare and health, Jaitley managed to stick to his fiscal deficit target of 3.5% of gross domestic product for the 2016/17 fiscal year that starts on April 1 - a pledge that may open the way for an early interest rate cut by the Reserve Bank of India.
“At first sight, it’s a good budget, a fire-fighting budget,” said Amitabh Dubey, director of India research at Trusted Sources.
“Rural demand is weak, private investment is dead in the water and, of course, we have a banking crisis,” he added. “They’ve announced some ease-of-doing-business-measures that are positive. But, in other ways, it’s a classic tax-and-spend budget.”
Modi’s change of course seeks to prevent a repeat of the fate of the last government led by his Bharatiya Janata Party (BJP), whose relentless optimism - summed up by its “India Shining” slogan - grated with voters who dispatched it after one term in 2004.
Jaitley reeled off a list of $16bn in measures targeted at the countryside, including spending on a job creation scheme, farmers’ welfare and building of rural roads.
The authorities would also make cooking gas available to 15mn poor households currently using firewood and other fuels, he said.
He also targeted a total of $130bn in credit to farmers.
“These steps will help our millions of farmers recover from the rough patch they have been going through,” said Yoginder K. Alagh, a farm expert and former planning official.
The government will also allocate $32bn for infrastructure development in 2016/17, an increase of 22.5% from last year, building 10,000km of new national highways and upgrading another 50,000km.
Those spending pledges leave scant cash over to recapitalise a state banking sector weighed down with bad loans to a corporate sector that itself is struggling under a heavy debt burden.
Jaitley announced a capital injection of just $3.6bn into public sector banks in the coming fiscal year - a fraction of total needs that his economic adviser, Arvind Subramanian, estimated at $26bn in his pre-budget report.