India unveils $550 billion budget, rejigs tax slabs

Indian 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 Rs45 trillion ($550 billion) spending plan presented by Finance Minister Nirmala Sitharaman in New Delhi on Wednesday seeks to do all that while still narrowing the budget gap to 5.9 per cent of gross domestic product in the fiscal year starting April from 6.4 per cent of GDP this year.

The government set a target to increase tax collection by nearly 12 per cent to Rs23.6 trillion next fiscal year, and borrow a record Rs15.4 trillion 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 Rs15.8 trillion 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 on Tuesday forecast India’s GDP to grow 6.5 per cent next fiscal year, higher than the 6.1 per cent pencilled 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 per cent expansion in the current year.

She proposed raising capital spending by more than a third to Rs10 trillion, 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.

“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 Rs700,000 from tax versus the earlier threshold of Rs500,000. While the measures would mean forgoing Rs350 billion 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.