India’s annual budget on Saturday is the second chance in seven months for Prime Minister Narendra Modi to update policy priorities to sustain a downward spiraling economy.
Finance Minister Nirmala Sitharaman is expected to detail fiscal measures that may include higher rural spending and possible tax cuts when she delivers her second New Delhi Budget address. The government is expected to increase its year – to-March budget deficit target from a projected 3.3 percent to 3.8 percent of gross domestic product.
Ms Sitharaman had to contend with slower tax revenue as the economy slowed down, and lower than expected revenue from sales of properties. She might be forced to borrow more and rely on India’s Reserve Bank for more dividends to help finance the budget.
The Government is set to miss its 3rd straight year fiscal deficit target. Economists in a Bloomberg survey also expect that Ms Sitharaman will increase the target for next year to 3.5 per cent of GDP, although a law on fiscal discipline requires the government will have to limit the deficit to 3 per cent by then.
Ms Sitharaman may use a so-called ‘ escape clause ‘ given in the rules to expand the goal of the current year by half a percentage point and also amend the law to push back the target of 3 percent by five years.
The government will need to mention exceptional circumstances to invoke the escape clause, such as a war, a fall in farm production or when the economy is undergoing structural reforms with unanticipated fiscal implications. A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd., said last year’s corporate tax cut, which entailed a $20 billion gift, could qualify as a justification enough.
The government is likely to boost borrowing to fund the wider fiscal deficit, with a Bloomberg News poll estimating probable Rs 7.8 lakh crore bond sales for the year beginning in April. That would be higher than the currently budgeted Rs 7.1 lakh crore.
The slowdown in the economy and the subsequent tax concessions for companies to raise investment means the government is likely to miss the Rs 16.5-lakh crore tax revenue target for the current year. ICICI Bank Ltd. reports a Rs 2.1 lakh crore deficit in tax revenues.
The government may be penciling in higher revenue from next year’s sale of state-owned companies, having fallen short of the current year’s Rs 1.05 lakh crore goal. It may also have to turn to the central bank for additional revenue. Every year, the RBI pays the Government dividends. Last year, it allocated Rs 1.76 lakh crore, including Rs 52.640 from its surplus capital, and IDFC First Bank estimates it could pay around Rs 1 lakh crore in the year beginning in April.
One way the government sought to prevent the fiscal deficit from ballooning was to make cuts due to a revenue shortage. Ms Sitharaman will make up for it by increasing next fiscal year’s public spending. Nomura Holdings Inc. expects increased spending in the rural sector, notably on job guarantees, affordable housing, health, education and farm income programs.
Subsidized loans for mobile phone producers are also under consideration, since the government is aiming to lure suppliers to Apple Inc. and Samsung Electronics Co.
The budget may give priority to investment over demand for short-term consumption, said Sonal Varma, an economist with Singapore-based Nomura. “We expect the budget to be mostly stable for growth as well as for inflation.”
Some analysts are predicting tax changes to help support businesses and consumers. Here are some possible changes:
- Tax rebates on home purchases: an increase in this measure would have a large multiplier effect for both employment as well as consumption, according to Edelweiss Securities Ltd.
- Cuts to personal income taxes, long-term capital gains, tax on share buybacks: Bank of America said this would help spur demand.
- Tax relief for individuals, minus exemptions as proposed by the Direct Taxes Code, would result in a net gain for the government, according to ICICI Securities.