India budgets for recovery, and for the poor, after cash crunch

Thursday, 2 February 2017 00:00 - - {{hitsCtrl.values.hits}}

Reuters: India will ramp up spending on rural areas, infrastructure and fighting poverty, Finance Minister Arun Jaitley said as he unveiled his annual budget on Wednesday, adding the impact on growth from the government’s cash crackdown would wear off soon.

Addressing parliament, Jaitley called his fourth budget one for the poor. Yet, while vowing prudent fiscal management, he also raised his 2017/18 federal deficit target to 3.2% of gross domestic product to cover his spending promises.

Jaitley called India “an engine of global growth” but highlighted risks to its outlook from likely U.S. interest rate hikes, rising oil prices and signs that globalisation is in retreat.

Prime Minister Narendra Modi’s surprise decision last November to scrap high-value banknotes worth 86% of India’s cash in circulation has hit consumer demand, disrupted supply chains and hurt capital investments.

The worst of the cash crunch is now over, however, and Jaitley said he expected it would not spill over into the fiscal year starting on April 1. A private manufacturing survey on Wednesday showed business was slowly returning to normal.

Still, the finance ministry forecasts that growth could dip to as low as 6.5% in the current fiscal year to March, before picking up slightly in the coming fiscal year to between 6.75 and 7.5%.

That is below the target rate of 8% or more that Modi needs to create enough jobs for the 1 million young Indians who enter the workforce in India each month. Half of the population in the nation of 1.3 billion is below the age of 25.

While opinions vary on how long the disruptions caused by Modi’s crackdown on untaxed and illicit wealth will last, there is near unanimity among economists that Asia’s third-largest economy needs a helping hand.

Jaitley said the government would hike capital investment by 25.4%. He also announced a 24% hike in rural and farm spending as part of Modi’s commitment to double farm incomes over five years.

But there was no extra room in the budget to increase capital support for India’s troubled state banks. Jaitley said he would pump in 100 billion rupees ($1.5 billion), in line with earlier plans.

Deficit slippage

In a surprise announcement, Jaitley said India would abolish the Foreign Investment Promotion Board, a government body, in a move that seeks to cut a layer of bureaucracy and make India an easier place to do business.

“Abolishing the FIPB will further boost foreign direct investment,” said Pravin Kumar Agrawal, a tax partner at Deloitte Haskins & Sells.

Modi has vowed to improve the ease of doing business in India, which is ranked a lowly 130th in the World Bank’s global rankings.

Economists had expected Jaitley would raise the fiscal deficit from the 3% that he had planned earlier - a target he now promised to meet in 2018/19.

“The fiscal deficit bit does not seem very credible. Jaitley is leaving room to exceed it at a later time. I think people will question the fiscal math over the next few days,” said Varun Khandelwal, managing director at Bullero Capital in New Delhi.

The deficit for the current year is expected to come in at around 3.5%.

Political dividends?

Jaitley’s fiscal largesse will not only boost consumer spending, but may also shore up the fortunes of Modi’s nationalist party in five regional elections for which voting begins on Saturday.

The electoral outcome, particularly in the battleground state of Uttar Pradesh that is home to one in every six Indians, would play a big part in determining whether Modi can win a second term in 2019.

Busting the deficit target, however, will worry ratings agencies at a time when oil prices - India’s most costly import - are on an upswing.

Standard & Poor’s has already warned that, at 68.5%, India’s public debt-to-GDP ratio is still too high.

A slowdown in fiscal consolidation would also limit the room for monetary easing. Investors are betting that the Reserve Bank of India would lower its policy rate by another 25 basis points (bps) as early as next Wednesday.

The central bank has cut interest rates by 175 bps since January 2015 to 6.25%.

Highlights of India’s 2017/18 Budget

Fiscal deficit

Projects 2017/18 fiscal deficit at 3.2% of GDP
Government remains committed to 2018/19 fiscal deficit at 3% of GDP
The 2017/18 budget seeks to pursue prudent fiscal management to preserve financial stability

Growth

Jaitley says India seen as an engine of global growth

Expenditure

Estimates 2017/18 total expenditure at 21.47 trillion rupees
Capital spending raised by 25.4% on year in 2017/18

Borrowing

2017/18 net market borrowing estimated at 3.48 trillion rupees
2017/18 gross market borrowing seen at 6.05 trillion rupees
Government to switch 250 billion rupees of bonds in 2017/18

Inflation

Consumer price index inflation is expected to remain within the central bank’s mandated range of 2 to 6%

Demonetisation

Demonetisation “a bold and decisive measure”, will make GDP bigger and lead to higher tax revenues - finance minister
Hit to economy from government decision to outlaw high-denomination notes will be “transient”, effects of demonetisation not expected to spill over to next year
Pace of remonetisation has picked up and will soon reach comfortable levels
No transaction above 300,000 rupees to be permitted in cash
Surplus money in the banking system will lower borrowing costs, increase credit flow

Taxation

2017/18 total tax revenue seen at 12.27 trillion rupees
2017/18 total revenue receipts seen at 15.16 trillion rupees
Proposes cuts in personal income tax for those at bottom end of income scale
Proposes to reduce income tax rate for medium and small enterprises with annual turnover up to 500 million rupees to 25%
Extends relaxation on withholding tax on foreign investor’s interest income from debt until June 30, 2020
Proposes change in capital gains tax in real estate, land

Agriculture

With a better monsoon agriculture is expected to grow at 4.1% in 2016/17
Agricultural credit target fixed at 10 trillion rupees ($147.88 billion) for 2017/18
Long-term irrigation fund allocated 400 billion rupees
Allocates 80 billion rupees for milk processing over 3 years
Farm insurance to cover 40% of net sown area, up from 30% last year
Modern law on contract farming will be drafted and circulated to states

Infrastructure

Allocates 3.96 trillion rupees for infrastructure in 2017/18
Allocates 2.41 trillion rupees for transport sector in 2017/18
Proposes 640 billion rupees investments in national and state highways in 2017/18

Foreign investment

Decides to abolish foreign investment promotion board
To exempt some foreign investors from indirect transfer provisions

Banking

The government to provide already planned 100 billion rupees capital infusion to state-run banks in 2017/18
Proposes to raise allowable provision for bad loans in banks to 8.5% from 7.5%
To introduce legislation changes for confiscating assets of economic offenders

Defence

2017/18 defence expenditure excluding pensions estimated at 2.74 trillion rupees
Defence capital outlay at 864.88 billion rupees

Divestment

Total disinvestment target 725 billion rupees in 2017/18
Proposes revised mechanism for time bound listing of public sector companies

Rural spending

Allocation for rural, agriculture and allied areas to increase by 24% to 1.87 trillion rupees
Allocates 480 billion rupees to rural jobs scheme in 2017/18, versus a revised estimate of 470 billion rupees in the current fiscal year
Allocates 190 billion rupees for rural road scheme in 2017/18
On course to complete 100% electrification by May 1, 2018, allocating 48 billion rupees for rural electrification scheme

Railways

Proposes to invest 1.31 trillion rupees in railways in 2017/18; budget 2017/18 allocates 550 bln rupees for railways
Dedicated railway safety fund of 1 trillion rupees over next five years
3,500 kms of railway lines to be commissioned in 2017-18 as against 2,800 km in 2016-17
Transformative measures have to be taken to make Indian railways competitive
Railways to withdraw service charges on online booking of tickets

Labour

nLegislative reforms to be undertaken to simplify, rationalise existing labour laws

Manufacturing and trade

Taking steps to make India a global hub for electronics manufacturing; received over 250,000 proposals last year with an investment value of 1.26 trillion rupees
Announces new trade infrastructure export scheme

Welfare spending

India to spend more in rural areas, infrastructure and poverty alleviation
The government will continue process of economic reforms for the benefit of the poor
To allocate 40 billion rupees for market-relevant training for youth
Total allocation for women and children welfare set at 1.84 trillion rupees
To double lending target under Mudra Yojana (Micro Units Development and Refinance Agency) to 2.44 trillion rupees
Airports Authority of India to monetize land around certain Tier 2 airports, use funds to upgrade airports

Commodities

To set up two more strategic oil storage in 2 states; proposes to create integrated oil company
Halves import tax on LNG to 2.5%
To integrate stock and derivative markets for commodities trading

Political party funding

Political transparency in political party funding; parties will need to file income tax returns
Proposes to amend central bank act for issue of electoral bonds for political funding
Proposes to limit maximum individual donation at 2000 rupees in cash for political funding

Housing

National housing bank to provide 200 billion rupees for housing loans
Affordable housing to be given infrastructure status
Long-term capital gains tax on immovable property to be levied after 2 years instead of 3 years

Finance Minister’s comments

“India stands out as a bright spot in the world economic landscape.”
“My approach in preparing the budget is to spend more on rural areas, infrastructure and poverty alleviation with fiscal prudence.”
“Signs of retreat from globalization have potential to affect exports from many emerging economies, including India.”
“One of the thrust areas of my tax proposals is to stimulate growth, give relief to the middle class, (promote) affordable housing, curb black money, bring transparency in political funding and simplify tax administration.”