Abu Dhabi, UAEThursday 26 November 2020

What Modi's final budget means for India and the upcoming election

Modi’s final budget before general elections in April cut taxes for middle-class voters and gives cash handouts to farmers

Tax cuts for middle-class workers and cash handouts for farmers re part of India's budget. Bloomberg
Tax cuts for middle-class workers and cash handouts for farmers re part of India's budget. Bloomberg

Siddhesh Kajrolkar and his wife Prerana have invested their life savings in opening a small, low-cost children's clothing store in a bustling area of Mumbai.

The shop opened just one week ago and business has been slow so far. But the Kajrolkars are hopeful that sales will pick up after the Narendra Modi government’s new budget, announced on Friday, comes into effect. The new zero income tax for those who earn up to 500,000 rupees doubles the previous threshold and the shop's target customers fit into that bracket.

“It will be good for us because people will have more money to spend on things like clothes,” says Mr Kajrolkar, sitting behind the cash desk in his narrow, freshly-painted store, empty of customers.

Not all businesses were as pleased with the budget, but there was largely a sense of relief.

“There were uncertainties on how populist the government would become and how damaging that would be for the economy,” says Shailendra Kumar, the director and chief investment officer at Mumbai-based Narnolia Financial Advisors. “It's settled now and it is not as bad as it was feared.”

Mr Modi’s final budget before general elections by May slashed taxes for the middle-class and provides cash handouts to farmers, an important voting bloc.

The government plans to earmark 750 billion rupees ($10.6bn) a year for the cash plan for about 120 million farmers with less than two hectares of land and give taxpayers 185bn rupees 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, according to Bloomberg.

It was widely expected that the government would focus on trying to win over mass numbers of voters as India heads towards a general election. This was its last major chance to woo the population, but it meant little was on the table in terms of big-ticket steps for corporates and significant economic reforms that could help boost job creation.

There had been some hopes among the business community that the government might reduce corporate taxes, for example.

With it being an election year, the budget was an interim one, and a full budget will be presented later this year following the polls.

“We are poised to become a 5 trillion-dollar economy in the next five years,” Mr Goyal told parliament. “We aspire to become a 10 trillion-dollar economy in the next eight years.”

His crowd-pleasing income tax announcement led to party members thumping their desks and chanting “Modi” in support of the measure.

Half of the population in the country depend on agriculture for their livelihoods, but small farmers in particular have struggled due to factors including rising input costs, which has pushed them into debt and led to high rates of farmers’ suicides, as well as prompting a series of recent protests.

“The farmers can take benefit of the roll-out to purchase seeds and aid agricultural production,” says Anand Rathi, the chairman of Anand Rathi Financial Services, a financial services firm headquartered in Mumbai. “This will in-turn help them be more financially independent.”

The government should have focused on employment generation and that can only come if the focus is on infrastructure and manufacturing.

Sunil Khanna, president and managing director at Vertiv Energy

The budget came hot on the heels of a leaked official report which shows unemployment hitting a 45-year high at 6.1 per cent in the year to June 2018, according to a document obtained by India's Business Standard newspaper. But the budget did not address what some are describing as a jobs crisis that India is facing.

“The government should have focused on employment generation and that can only come if the focus is on infrastructure and manufacturing,” says Sunil Khanna, the president and managing director at Vertiv Energy.

Meanwhile, many are worried about the government overspending.

“This is a largely populist budget which continued to harp on the farmers and individuals rhetoric,” says Mahesh Singhi, the founder and managing director of Singhi Advisors, a global investment banking firm, headquartered in Mumbai. “The government has thus resorted to traversing the path of electoral populism over fiscal discipline.”

Many analysts are scratching their heads over how New Delhi plans to fund these expensive schemes. The government increased its fiscal deficit target – the difference between its revenue and spend - to 3.4 per cent from 3.3 per cent for this year, but there is doubt over whether it would be able to stick to this target, given its generous giveaways in the budget.

“The speech was muted on the sources of revenue,” says Nabin Ballodia, a partner, tax, at KPMG in India.

This prompted the rupee to weaken fractionally against the US dollar on Friday to 71.25.

Robin Banerjee, the managing director of Caprihans India, a manufacturing company, is also skeptical.

“Where will the money come from?” he asks. “The concern with any budget is the financial discipline.”

He explains that he doubts that taxation and earnings from state-owned companies could cover these costs. As a result, the government will have to depend on selling off stakes in the firms it owns, he says.

“But historical evidence shows the government has not done well in disinvestment,” Mr Banerjee adds.

For example, the government failed to attract a single bidder when it tried to sell off its debt-laden flag carrier Air India last year. In the budget, Mr Goyal outlined a goal of raising 900 billion rupees from disinvestment.

“Disinvestments will need to be front-loaded to achieve the ambitious target and tax collections aggressively pursued,” says Dharmakirti Joshi, the chief economist at Crisil, a ratings and research firm which is part of Standard & Poor's. This will be important to keep government bond yields in check, he adds.

He describes the first three years of the Modi government as fiscally prudent, helped by low oil prices.

But “strains appeared in 2018 as the economy slowed, tax receipts suffered, revenue expenditure overshot, and the oil subsidy bill soared”, says Mr Joshi. “Now the need to address farm distress and support the middle class have stretched that further.”

Analysts at Nomura in a research note wrote: “The cumulative effect of the cash transfer to farmers and the middle income class will be a boost to consumption, but likely at the cost of crowding out private investments.”

Consumer goods companies in India are looking forward to benefiting from the budget, though.

These include businesses ranging from packaged food companies to car and motorcycle manufacturers.

“It’s good to see the focus of the interim budget on the rural sector and middle class,” says Kalyan Krishnamurthy, the chief executive of Flipkart Group, India's home-grown answer to Amazon, which US retail giant Walmart bought a majority stake in last year. “More money in the hands of rural and middle class is good for driving consumption in the country and hence good for economic growth.”

But while many in India may benefit from the budget, Promoth Manghat, the group chief executive at UAE Exchange, a foreign exchange firm points out that there is not much for non-resident Indians (NRIs) to get excited about.

“There has been little of significance to show for in the interim budget for the NRI community be it tax reforms or investment incentives which is less encouraging,” says Mr Manghat.

But back in Mumbai, for Siddhesh and Prerana Kajrolkar, they hope the budget has given them the boost they will need to help make their small business a success.

Updated: February 2, 2019 01:49 PM

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