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FM Arun Jaitley Budgets For Recovery, And For The Poor, After Cash Crunch

India will ramp up spending on rural areas, infrastructure and fighting poverty, Finance Minister Arun Jaitley said as he unveiled his annual budget on Wednesday, adding the impact on growth from the government's cash crackdown would wear off soon

Photo Credit : Reuters


India unveiled a budget on Wednesday (February 01) to help the poor with hikes in government spending and cuts in taxes as Prime Minister Narendra Modi seeks to win back the sympathy of voters hit hard by his recent crackdown on "black money".

Finance Minister Arun Jaitley announced increases in spending on rural areas, infrastructure and fighting poverty, and sought to assure lawmakers and the country that the economic impact of the government's cash crackdown would wear off soon.

Jaitley halved the basic personal income tax rate, and cut taxes on small firms that account for 96 per cent of India's businesses, while imposing an income-tax surcharge on the better off.

"It's an election budget, to all intents and purposes, with a massive push on rural spending and some quite big tax cuts," said Shilan Shah, India economist at Capital Economics in Singapore.

The budget sops come days before India holds five regional elections that will influence whether Modi can win a second term as Indian leader in 2019.

"This budget is yet again devoted to the wellbeing of villages, farmers and the poor," the 66-year-old leader said in a national TV address after Jaitley delivered his two-hour budget speech.

As economists polled by Reuters had expected, Jaitley raised the target for the federal fiscal deficit to 3.2 per cent of gross domestic product in 2017-18 - effectively postponing the goal of bringing it down to 3 per cent.

Economists, however, said that the sheer scale of the government's promises on tax cuts and spending increases cast Jaitley's higher deficit goal into doubt.

Balancing the books will depend on him hitting his target to sell Rs 72,500 crore ($10.7 billion) of state assets - or nearly 60 per cent more than the expected proceeds this year.

"Jaitley is leaving room to exceed it at a later time," said Varun Khandelwal, managing director at Bullero Capital in New Delhi. The finance ministry estimates the deficit will come in at 3.2 per cent this year, compared with its 3.5 per cent target.

Indian shares rose 1.5 per cent after Jaitley unveiled a range of incentives to boost infrastructure investment and develop the rural economy. But government bonds ticked lower on concerns over the higher deficit.

Modi's shock decision in November to scrap high-value banknotes worth 86 per cent of India's cash in circulation has hit consumers, disrupted supply chains and hurt investment.

The worst of the cash crunch is now over, however, and Jaitley said he expected it would not spill over into the next fiscal year. Still, the finance ministry forecasts growth could dip as low as 6.5 per cent this fiscal year before picking up to between 6.75 and 7.5 per cent in 2017-18.

That is below the target rate of 8 per cent or more that Modi needs to create enough jobs for the 1 million young Indians who enter the workforce each month.

While opinions vary on how long the disruptions caused by the crackdown on untaxed and illicit wealth will last, most analysts say Asia's third-largest economy needs a helping hand.

Jaitley hiked capital investment by 25.4 per cent, and announced a 24 per cent increase in rural and farm spending. Health spending will rise by 28 per cent - as reported by Reuters earlier this week.

But there was no extra room to increase support for India's troubled state banks. Jaitley said he would pump in Rs 10,000 crore ($1.5 billion), in line with earlier plans.

On the tax side, Jaitley's standout announcements were the halving of the lowest rate of personal tax to 5 per cent that applies on incomes between Rs 250,000 and Rs 500,000 rupees ($3,700-$7,400). Better-off taxpayers will pay a 10 per cent surcharge.

Small businesses with turnover up to Rs 500 million a year will see their tax rate cut to 25 per cent from 30 per cent. Taken together, the cuts in direct taxes would cost the public purse close to $3 billion.

In a surprise move, Jaitley said India would abolish the Foreign Investment Promotion Board, in a move to cut a layer of bureaucracy and make it easier to do business in India, which ranks a lowly 130th in a World Bank league table.

"Abolishing the FIPB will further boost foreign direct investment," said Pravin Kumar Agrawal, a tax partner at Deloitte Haskins & Sells.

Jaitley also announced a tightening of rules governing the funding of political parties, which are notorious for relying on undeclared donations to cover the vast expense of campaigning in the world's largest democracy.

This included slashing the maximum cash donation to Rs 2,000 ($30) and requiring parties to file income tax returns.

Jaitley's fiscal largesse will not only boost consumer spending, but may also shore up the fortunes of Modi's nationalist party in five regional elections for which voting begins on Saturday.

Punjab and Goa go to the polls first, to be followed by the big battleground state of Uttar Pradesh, and finally the small northern states of Uttarakhand and Manipur. Results of all five elections are due on March 11.


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