[The budget speech, given by India’s finance minister, Arun Jaitley, came against a sunny economic backdrop in India, especially in comparison with other developing economies. The government now predicts a growth rate of 7.4 percent in the current fiscal year. Meanwhile, lower oil and other commodity prices helped curb India’s chronic budget deficits, a development that Raghuram G. Rajan, the governor of the Reserve Bank of India, described as “a $50 billion gift for the economy.”]
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India’s
finance minister, Arun Jaitley, with
budget documentsSaturday
in New Delhi.
Credit European Pressphoto Agency
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NEW DELHI — Prime
Minister Narendra
Modi’s government unveiled its first full-year budget on Saturday,
promising to boost growth with a major increase in public spending on
infrastructure and to lower the corporate tax rate, steps that were cheered by
Indian industry.
Those market-friendly
moves were balanced by new welfare programs for the poor, like the creation of
a new social security plan to provide subsidized insurance and pensions, and
relaxed targets for reducing the fiscal deficit.
The budget was eagerly
anticipated by economists and industrialists, who had been hoping it would
contain major reforms that would jump-start a vibrant new investment cycle. But
the changes proposed were more incremental in nature, and markets — which had
specially opened on a Saturday for the occasion — swooned and then recovered,
ending trading slightly higher.
The budget speech, given
by India’s
finance minister, Arun Jaitley, came against a sunny economic backdrop in
India, especially in comparison with other developing economies. The government
now predicts a growth rate of 7.4 percent in the current fiscal year.
Meanwhile, lower oil and other commodity prices helped curb India’s chronic
budget deficits, a development that Raghuram G. Rajan, the governor of the
Reserve Bank of India, described as “a $50 billion gift for the economy.”
Mr. Jaitley began his
speech on a triumphal note, proclaiming that the government had rebuilt India’s
reputation with investors.
“The credibility of the
Indian economy has been re-established,” Mr. Jaitley said. “The world is
predicting that it is India’s chance to fly.”
Ahead of the budget, much
tension arose around the question of what was more important: to curb
government spending or to spur growth by ramping up public investment, shifting
the burden off a heavily indebted private sector and stressed banks.
Saturday’s $288 billion
budget leaned toward the latter, increasing annual spending on roads, ports and
railways by the equivalent of about $11.36 billion. It also scaled back goals
for spending cuts, increasing the fiscal deficit target to 3.9 percent of the
gross domestic product from a target of 3.6 percent, and slowing the timeline
for a reduction to 3 percent by a year.
The combination left most
market analysts satisfied, if not especially excited.
“This is not a big-bang
budget, but a good budget more focused on smaller issues, and ironing out a lot
of irritants to investors in the process,” said Sujan Hajra, chief economist at
Anand Rathi Financial Services in Mumbai. The slower timeline for spending
cuts, he allowed, was “not particularly positive.”
In his speech to
Parliament, Mr. Jaitley raised expectations for a dramatic announcement, saying
“it is quite obvious that incremental change is not going to take us anywhere.”
“We have to think in
terms of a quantum jump,” he said. But toward the end of the speech, he seemed
to defend himself against accusations of excess caution.
“People who urged us to
undertake big-bang reforms also say that the Indian economy is a super giant,
which moves slowly but surely,” he said.
Critics on Saturday complained
that the new government had missed a chance to increase revenues and cut its
spending, especially on inefficient subsidy programs, and was relying too
heavily on improved growth and low inflation. Among them was Manmohan Singh,
who served as India’s prime minister for 10 years under the Congress Party.
“Mr. Jaitley is a very
lucky finance minister,” Mr. Singh told the NDTV news channel. “He has
inherited an economy which is in reasonably good shape. Inflation is under
control, not because of anything we have done, but because the international
prices of petroleum and other commodities have gone down.”
He added, “I had hoped
that the finance minister used this lucky phase of his inheritance to give a
real big boost to stabilize the economy, strengthen the macroeconomic
framework.”
Mr. Modi’s Bharatiya
Janata Party suffered a setback in recent state elections in
Delhi, where the upstart Aam Aadmi, or Common Man, party, cast him as
indifferent to the needs of the poor. Mr. Jaitley, on Saturday, seemed intent
on blunting that accusation. A new subsidized insurance program would provide
coverage for accidents or death at a cost to enrollees of 12 rupees a year, or
around 20 cents.
There were no significant
changes to India’s colossal subsidy programs for food, fuel and fertilizer,
which cost the government around $40 billion a year. The new government hopes
to save money by transforming subsidies into direct cash transfers to people’s
accounts, a step that could save around $4 billion a year by eliminating
corruption, according to the Credit Rating Information Services of India
Limited.
Jayshree Sengupta, a senior
fellow at the Observer Research Foundation, said the budget’s focus on welfare
was unexpected.
“You know, I had expected
it to be a very pro-business, pro-rich budget, and I was really surprised by
how much he has given to the rural employment scheme” and other development
programs, she said.
One way the government
intends to increase revenues is by cracking down on tax evasion, which is
rampant. Mr. Jaitley, speaking to a television interviewer after the speech,
estimated that the government receives tax payments from only around 35 million
Indians, or roughly 3 percent or 4 percent of the total population.
The new budget proposes a
penalty of up to 10 years of “rigorous imprisonment” for concealing assets
overseas, and would require citizens to provide a government identification
number when making a purchase or sale of more than $1,622. A new 2 percent tax
will also be levied on the “superrich.”
Corporate taxes,
meanwhile, will drop from 30 percent to 25 percent over the next four years,
which could increase Indian firms’ compliance, said Ajay Bodke, head of
investment strategy at Prabhudas Lilladher, a brokerage firm in Mumbai.
Previous governments, he said, have given “given extremely aggressive revenue
targets to tax officers, who in turn go about raising unreasonable demands.”
Mr. Jaitley set a
deadline of April 2016 for a taxation change long sought by investors, which
would replace multiple layers of local taxes currently levied at state borders
with a national Goods and Services Tax. A constitutional amendment bill for the
introduction of the Goods and Services Tax has been introduced in the lower
house of Parliament, but a lack of realistic deadlines or credible information
had slowed progress, analysts said.
Several of the changes
most ardently desired by investors could not be achieved in the budget, and
instead require Mr. Modi to navigate a polarized legislature.
Among them is the
liberalization of a highly restrictive 2013 law governing land purchases, which
requires buyers to secure the consent of 80 percent of landowners on the
property. Mr. Modi’s government has submitted an executive ordinance that would
eliminate the consent clause and the requirement of a social impact assessment
if land is to be used in certain ways — for industrial corridors, and
affordable housing, among others — but needs the approval of both houses of
Parliament. The new government has yet to propose changes to India’s stringent
labor laws, which have also deterred investors.
Hari Kumar contributed reporting.
