India on Saturday unveiled an annual budget that pledged to boost people's incomes as Prime Minister Narendra's Modi government aimed to revive the country’s slowing economy, with the pace of growth slumping to its lowest level in more than a decade.
India's finance minister Nirmala Sitharaman was under huge pressure to meet sky-high expectations to formulate a budget that would foster growth in the next financial year - which starts at the beginning of the April - while trying to keep the country’s fiscal deficit in check as a far as possible.
Highlights of the budget aimed at addressing the economic challenges included a widely-anticipated cut in personal income tax, a big push on investment in infrastructure, and an injection of close to $40 billion (Dh146 billion) into the country's farming sector. It also abolished a tax on dividend distributions.
“The budget has clearly been a pro-people and populist budget with a view to address the concerns across diverse spectrums of the economy,” says Rajesh Narain Gupta, the managing partner at SNG & Partners, an Indian corporate law firm. But he warns that “it remains to be seen how these big-ticket announcements would translate into reality”.
“This is the budget to boost incomes and enhance their purchasing power,” said Ms Sitharaman in a speech ahead of its release. “Only through higher growth we can achieve that and have our youth gainfully and meaningfully employed.”
India's economy was the world's fastest growing in 2018. But the government expects GDP growth of just 5 per cent in the current financial year, which runs until the end of March. That would be the country’s slowest growth since the 2008 global financial crisis.
Weak private investment and consumer demand, exacerbated by a credit crisis in the country's non-banking financial sector, have pressured the economy in the last year.
Ms Sitharaman's delivery of the budget lasted more than two and a half hours, making it the longest ever budget speech. She cut off the end of her speech, however, as she started to feel unwell.
Stock markets, too, were ailing by this point. The benchmark S&P BSE Sensex fell more than 1 per cent during afternoon trading. Stock markets in India opened on Saturday to allow investors to trade as the country’s budget was unveiled.
This came after the benchmark index suffered a fall of 1.3 per cent in January - its worst start to the year since 2016.
"Though the budget focused on agriculture and rural development, it didn’t meet expectations,” says Deepthi Mary Mathew, an economist at Geojit Financial Services. “The abolishment of the dividend distribution tax is a welcome step. However, for consumption revival, the finance minister mainly focused on the adoption of [a] new tax regime. It needs to be looked into whether the new regime will be enough [to revive] the consumer spending.”
Given the high hopes, there was clearly some disappointment too.
“As the market reaction suggests, it gives a picture that budget 2020 was a disappointing one,” says Ajit Mishra, vice-president of research at Religare Broking, based in New Delhi. “It fell short of expectations as the stimulus package for rural, infrastructure and transportation was up marginally. Further, even the widely-expected personal income tax came with a caveat of having to forego earlier exemptions and deductions.”
But he adds that “it is important to note that the expectations were way higher this time around from the government considering the ongoing economic slowdown”.
“Further, the government had limited resources due to lower tax collections,” said Mr Mishra.
Overall, he says the budget is “a worthy attempt to cater to the needs of all sections of society and at the same time provide fiscal stimulus to key social sectors”.
There is also some skepticism among investors about how the steps announced will be implemented.
The government has already taken steps to boost growth in recent months but this has come at a price. Ms Sitharaman revealed that fiscal deficit for the current financial year would increase to 3.8 per cent of GDP, which was in line with expectations, up from an earlier target of 3.3 per cent. For next year, the fiscal deficit has been set at 3.5 per cent.
In the budget, plans were announced to develop 100 additional airports by 2024, with a goal to privatise at least one major port. However, there was no timeline specified for privatising the port.
The government also announced 100 per cent tax exemption on sovereign wealth funds’ investment into infrastructure, which analysts say could help boost foreign inflows.
Increased investments into infrastructure and opportunities for the private sector have cheered many Indians, including non-resident business leaders in the UAE.
“The 2020 budget demonstrates the resolve of the government to spur growth in the backdrop of the lowest rate of expansion in over a decade,” says Promoth Manghat, group chief executive of Finablr.
New Delhi has announced a series of costly measures over the past six months in an effort to revive the economy. This includes a $20bn corporate tax cut scheme that was announced in September. These steps have had a limited impact, however, in terms of boosting investment and consumer spending, which piled the pressure on the annual budget to unveil more stimulus for the economy.
But Jimeet Modi, the founder and chief executive of SAMCO Securities, says the “reforms will bear fruits in the long term ... if executed well”.
“Markets should have a long-term view rather than just focus on the short term,” he says. “To sum it all, the budget is long term growth-oriented but lacks short-term kickers.”
India’s annual economic survey, released on Friday, revealed a brighter outlook for the economy. It forecasts that growth will pick up to between 6 and 6.5 per cent in the financial year which begins in April.
But some experts are less optimistic.
The International Monetary Fund (IMF), in its latest World Economic Outlook last month, slashed its growth forecast for India to 4.8 per cent from an earlier projection of 6.1 per cent for the current financial year, saying that “domestic demand has slowed more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth”.
Meanwhile, Mr Modi has an ambitious plan to transform India into a $5 trillion economy by 2025. But to achieve that target, the country would need to be hitting growth levels of around 8 to 9 per cent.
Jitendra Gianchandani, the chairman of Jitendra Consulting Group, said “all in all, there was no out of [the] box announcements considering the goal”.
India’s economy might need to grow to create much-needed jobs for its young population. The country has more than one million people entering the workforce each month, according to official data.
But some sectors, including the real estate industry, were not confident that they will get a significant boost from the budget to help create a high number of jobs.
“The union budget announcement continues to focus on affordable housing and infrastructure, more specifically, urban infrastructure and logistics – however, we do not see [a] significant impact on the real estate sector,” says Ramesh Nair, the chief executive and country head of JLL India, a property consultancy. “Keeping in mind the limited fiscal room available to the government, the focus of the budget is to increase liquidity and enhance consumer demand through benefits and simplification of personal income tax.”
