Indian prime minister Narendra Modi made a populist push in his final budget before general elections in April, cutting taxes for middle-class voters and giving cash handouts to farmers.
The government will allocate 750 billion Indian rupees ($10.6bn) a year for the cash plan for about 120 million farmers and give taxpayers 185bn Indian rupees ($2.6bn) of relief in the year to March 2020, interim finance minister Piyush Goyal said in his budget speech in New Delhi on Friday.
In the process, the government will widen its fiscal deficit targets for the current financial year and next, to 3.4 per cent of gross domestic product and borrow more. Bonds and the rupee fell on news of the debt plans, while the tax cuts helped to buoy stocks.
“Ongoing slippage from the government’s budgeted fiscal deficit targets over the past two years, and our expectation that the government will face challenges meeting its target again this coming fiscal year does not bode well for medium term fiscal consolidation,” said Gene Fang, an associate managing director at Moody’s Investors Service.
“We view this continued slippage as credit negative for the sovereign.”
The government will give 6,000 Indian rupees ($84.7) a year to about 120 million small farmers, said Mr Goyal, who stepped in as finance minister last week after Arun Jaitley went on medical leave. Individuals with an annual income of 500,000 Indian rupees ($7062.1) or less will be exempted from tax, he said.
“India is solidly back on track and marching towards growth and prosperity,” the minister said. “We have prepared the foundation for sustainable growth, progress and better quality of life for all our people.”
The budget - a 28.7 trillion India rupees ($402.4bn) spending plan - was Modi’s last attempt at reversing fortunes after his Bharatiya Janata Party lost control of three key states in regional elections last month. The government also boosted allocations to rural infrastructure and employment programmes.
“The focus of the budget is on the real estate sector, rural economy and consumption,” Keki Mistry, chief executive officer of Housing Development Finance Corporation - an Indian financial conglomerate - said in an interview.
“At the end of the day, it benefits the entire economy,’’ because India is a domestic-focused economy, he said.
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To make up for some of the revenue shortfall in the current financial year, Mr Goyal budgeted higher dividends from the central bank and state-owned lenders. He pencilled in 829.1bn Indian rupees ($11.7bn) as dividends from the Reserve Bank of India (RBI) – country’s central bank - and the state-run lenders next year, up 12 per cent.
With inflation at an 18-month low, weakening consumer demand and mounting global risks would have given the new RBI governor Shaktikanta Das, an opportunity to support the economy through interest rate cuts.
“We expect the Reserve Bank of India to view the budget as inflationary and flag this as an upside risk to inflation,” said Sonal Varma, chief India economist at Nomura Holdings in Singapore.
“The expansionary fiscal impulse, at the margin, negates the need for the Reserve Bank of India to consider monetary easing at this stage.”
The central bank’s the Monetary Policy Committee will review rates next week, with the decision due on February 7.