Mixed reactions to new Indian finance minister's budget

Pragmatism welcomed but lack of big budget fiscal stimulus programmes to revive slowing economy a concern

Indian Finance Minister Nirmala Sitharaman, center, and junior Finance Minister Anurag Thakur, left, stands for the media at the parliament house before presenting the annual federal budget in New Delhi, India, Friday, July 5, 2019. India's government says the economy is expected to grow at 7% in 2019-20, up from a five-year low of 6.8% in the past year. (AP Photo/Manish Swarup)
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Most business leaders and economists welcomed what is seen as a “pragmatic” annual budget from India’s re-elected government led by Narendra Modi.

But it fell short of the “big bang” announcements some were hoping for.

The budget was presented by India's new Finance Minister Nirmala Sitharaman on Friday against the backdrop of a slowing economy and high unemployment. The government has a major challenge on its hands to tackle these issues and meet high hopes following Prime Minister Mr Modi's landslide election victory in May.

"Contrary to the expectation, the finance minister didn't announce any big budget fiscal stimulus programmes to revive the slowdown in the economy," says Deepthi Mathew, an economist at Geojit Financial Services in Kochi in the southern state of Kerala.

The budget instead focused on improving infrastructure and attracting foreign investment, which in the longer term should help boost the economy and create jobs, analysts say. Ms Sitharaman, the first female finance minister to present India's budget, announced plans to spend 100 trillion rupees (Dh5.37tn) on infrastructure over the next five years, including upgrading 125,000 kilometres of roads.

She also outlined a vision to open up sectors including aviation, media and insurance to more foreign direct investment.

“I propose to further consolidate the gains in order to make India a more attractive FDI destination,” Ms Sitharaman said.

Plans were announced to increase taxes on the wealthy and reduce corporate taxes for more businesses, raise spending on agriculture to alleviate what is being described as an "agrarian crisis", and sell off holdings in state-owned companies, including the debt-laden national airline Air India.

S Ranganathan, the head of research at LKP Securities, a brokerage in Mumbai, says: “It is a pragmatic budget which cleverly balances the massive spending envisaged in the infrastructure space and has also managed to find the resources without burdening the common man or the middle class with additional taxes.”

The measures unveiled are all part of a road map to work towards the government's ambition of almost doubling the Indian economy to $5 trillion GDP by 2025.

Ms Sitharaman says the economy is set to expand to $3tn in the current financial year.

“A series of measures to enhance capital flows and employment generation are great steps,” says Jatin Dalal, the senior vice president and chief financial officer at Wipro, one of India’s biggest multinational technology companies based in Bangalore. “Better growth with macroeconomic stability will be the ideal outcome.”

Sonal Varma, the managing director and chief India economist at Japanese investment bank Nomura, says "the budget reinforces the new government's focus on investment-driven sustainable growth instead of a short-term consumption-led one". "We believe the budget ticks all the right boxes on improving the investment climate and reform," she added.

Non-resident Indian business chiefs in the UAE are also largely positive.

"Unlike the previous year, the resounding mandate given to the Modi government has allowed it to present a balanced, growth-focused budget not hamstrung by the populist pressures of an election year," says BR Shetty, the founder and chairman of NMC Health, Finablr and BRS Ventures.

India’s economy is in need of a boost after growth slowed to a five-year low of 6.8 per cent in the financial year to the end of March, according to official figures.

The country lost its title of being the world's fastest expanding major economy after GDP growth for the first three months of the year slumped to 5.8 per cent. Government data reveals the country's unemployment rate hit a 45-year-high of 6.1 per cent in the year to June 2018.

In reaction to the budget, Arun Nanda, the chairman of travel company Mahindra Holidays, says he “is a little disappointed”.

“There was a lot of talk, a lot of things which were pleasant to the ear but one of the biggest challenges to the economy is jobs and the two quick hits to create jobs are the construction and tourism industry but there was no mention [of them],” says Mr Nanda.

Markets also reacted negatively to the budget. The benchmark BSE Sensex closed down by 0.99 per cent on Friday at 39,513.39. The Indian rupee was virtually flat at 68.42 against the US dollar.

One budgetary provision that is largely well received is the announcement that India's public sector banks will be injected with an additional 700 billion rupees of capital. India's banking sector has been burdened with enormous levels of bad debt following a wave of defaults by corporate borrowers. Some respite for the sector was much-needed, experts say.

"The move will boost investor confidence in the banking sector," says Rajesh Gupta, managing partner, SNG & Partners, an Indian law firm.

The non-banking or "shadow banking" financial sector, which has been struggling under a liquidity crisis, also secured some comfort in the budget which announced a measure to improve access to funds by providing a partial guarantee to state banks that acquire assets from shadow bank.

But Mr Gupta says these moves "can be, at best, viewed as short-term benefits for the banking sector and non-banking financial sector, and the government will need to formulate long-term solutions to alleviate the crisis in the country's financial sector".

What did come as a surprise to most analysts, though, given India's flagging economy, is the fact that Ms Sitharaman narrowed the fiscal deficit target to 3.3 per cent from 3.4 per cent of GDP. There had been widespread expectations that the fiscal deficit target would widen, with the state loosening its purse strings to stimulate growth.

Analysts remain sceptical the government can bring down the deficit to the set target.

“We believe it will be a struggle as the revenue assumptions do look optimistic,” says Ms Varma.

In terms of measures to raise more state revenues to keep deficit in check, the government announced a number of higher levies.

Ms Sitharaman announced: a hike in taxes on the rich; higher charges on fuel; and duties on gold imports to be raised to 12.5 per cent from 10 per cent.

India is a major importer of oil and gold.

Rise in fuel and gold duties were not good news to businesses. Indians are among the world's biggest consumers of gold due its cultural significance as a precious metal and as a means of storing wealth.

"The gems and jewellery industry received a big setback," says Abhishek Bansal, the chairman of ABans Group of Companies, a company in Mumbai that deals in commodities. "Gold demand in India may drop further, as gold prices are already at multi-year highs and jewellery will become unaffordable to small-pocket households."

This budget was always going to be a tough balancing act for the government, however.

"Overall the government has tried to balance with where they need to spend and where the money will come from," says Robin Banerjee, the managing director of Caprihans India, a manufacturing company.

“There is no such thing as the perfect budget,” he says.

“Everyone will think ‘I should have got a little more and that person should have got a little less’.”