Modi sticks with India deficit plan as pro-farmer budget revealed

The shortfall will narrow as planned to 3.5 per cent of GDP in the year starting April 1, the smallest gap since 2008, finance minister Arun Jaitley said.

Prime minister Narendra Modi stuck with a plan to narrow the deficit in the next fiscal year even while providing relief for farmers in a budget that signalled his intent to win back support in rural areas ahead of key state elections.

The shortfall will narrow as planned to 3.5 per cent of GDP in the year starting April 1, the smallest gap since 2008, finance minister Arun Jaitley told lawmakers on Monday. It will hit a target of 3.9 per cent of GDP in the current fiscal year, he said, adding that longer-term goals will be reviewed. The budget documents forecast a fiscal deficit of 3 per cent of GDP in the following two fiscal years.

“Different schools of thought have argued either in favour of fiscal consolidation and stability or for less aggressive consolidation and for boosting growth,” Jaitley said in a speech that lasted for about 90 minutes. “I have made the policy option and decided that prudence lies in adhering to fiscal targets.”

The move may help Modi win another rate cut as low global oil prices are forecast to keep inflation near next year’s target. Central bank Governor Raghuram Rajan last month warned of higher bond yields if Modi strayed from the deficit-reduction path, calling macroeconomic stability India’s “single most important strength” in a time of global market turmoil.

The markets were mixed after Jaitley’s speech. The S&P BSE Sensex index pared earlier losses of as much as 2.9 per cent and was trading 0.2 per cent lower as of 1.04pm in Mumbai, the rupee strengthened 0.1 per cent to 68.5450 a dollar while the yield on the benchmark 10-year sovereign bond fell 14 basis points to 7.64 per cent after Jaitley stuck to his deficit targets.

With as many as nine state elections coming up in the next fiscal year, Modi faced pressure to provide relief for farmers suffering after India’s first back-to-back droughts in three decades. About 70 per cent of the nation’s 1.3 billion people live in small villages.

“We have a desire to provide socio-economic security to every India, especially the farmers, the poor and the vulnerable,” Jaitley said. “We have a dream to see a more prosperous India and a vision to transform India.”

Budget Highlights

Farm reforms:

• Double farmer income in five years

• Expand irrigation and crop insurance program

• Unprecedented farm credit target, unified agriculture market

Relief for poor:

• Health insurance scheme to protect a third of population

• Ensure universal coverage of cooking gas

• Record allocation for rural jobs programme

Receipts:

• India sets gross market borrowing at 6 trillion rupees (Dh321.8 billion) for FY17, compared with 6.8 trillion estimated in a Bloomberg survey

• Debt switch and buyback seen at 750 billion rupees

• Jaitley proposed a divestment target of 565 billion rupees, including 205 billion as strategic sales, compared with 695 billion rupees in the previous year

Infrastructure:

• More rural roads, railways

• 85 per cent of stalled road projects are back on track

• 100 per cent electrification of villages by May 2018

Foreign investment / banks:

• To allow 100 per cent FDI in food processing

• FDI rules eased in exchanges, insurance, asset reconstruction

• Jaitley vows to stand behind state-run banks

Taxes:

• India will increase tariffs on tobacco, the usual victim of India’s sin taxes

• Jaitley also proposed steps that will allow citizens a chance to declare undisclosed income and pay a penalty, without any further scrutiny

• Securities transaction tax on stock, index options proposed at 0.05 per cent from 0.017 per cent

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