Indian Prime Minister Narendra Modi has his first chance since a decisive election win to spur an economy that’s quickly lost its status as the world’s fastest-growing major one.
Newly appointed Finance Minister Nirmala Sitharaman is expected to boost spending and provide tax relief to consumers in her maiden budget on Friday. That will probably widen the budget gap to 3.5% of gross domestic product in the year started April 1 from 3.4% targeted in February’s interim spending plan, according to a Bloomberg News survey.
Growth slowed to a five-year low of 5.8% in the first three months of 2019 — well below China’s 6.4% expansion — putting pressure on Modi to deliver on a stimulus plan to kickstart consumption, a bedrock of the economy. With the global outlook turning gloomy amid heightened trade tensions, and the Reserve Bank of India already cutting interest rates three times this year, the focus is shifting to the government to play its part.
“For the next budget exercise, the development goal might supersede the rigid objective of fiscal austerity,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India in Mumbai. “Sticking to a particular fiscal number is not that important in the current scenario.”
Sitharaman will need to balance allowing the budget deficit to widen without risking a credit-rating downgrade and rattling bond markets. Key to that will be finding additional revenue to finance higher spending and keeping borrowing under control.
Here are other key things to watch for in the budget:
Revenue from consumption taxes and customs levies undershot targets last year, and Sitharaman will need to find additional resources to fund welfare programs without increasing the tax burden on individuals. She’s expected to give consumers relief by increasing the personal income tax threshold for some individuals in the budget, according to people familiar with the matter.
Analysts at Kotak Mahindra Bank led by Suvodeep Rakshit estimate that tax revenue will probably be 1.4 trillion rupees ($20 billion) lower than was forecast in the interim budget. “This will be the most significant threat to the fiscal math,” the analysts said in a note.
The government may sell stakes in state-run companies to help boost revenue. Last year it raised 850 billion rupees from selling assets such as Coal India Ltd. and Bharat Heavy Electricals Ltd. Expect the disinvestment target to be pegged at 1 trillion rupees, higher than the 900 billion rupees penciled-in in the interim budget, according to Yes Bank analysts led by Shubhada Rao.
The market will look for any mention of measures by Sitharaman to tide over a crisis in the financial sector, especially shadow lenders. A liquidity crunch faced by non-banking finance companies was a major drag on growth, as it curbed their ability to lend, which in turned crimped consumption. As India’s shadow banks have the biggest exposure to the real estate sector, any measure to lower tax rate on property transactions could benefit the sector, said SBI’s Ghosh.
The government is seeking to extract higher dividends from the RBI to help boost its revenue and finance the deficit, and the budget may give a provisional figure on how much will be transferred for the remainder of the fiscal year. The central bank gives dividends to the state every year and made an interim payout of 280 billion rupees in February. The government has been pushing for the RBI to boost its contribution, with Finance Ministry officials estimating the central bank has surplus capital of 3.6 trillion rupees. A panel led by former central bank Governor Bimal Jalan was set up to study the RBI’s capital framework, and is yet to finalize its report.
One of the key election pledges of Modi’s Bharatiya Janata Party was to spend $1.44 trillion to build roads, railways and other infrastructure in the next five years. Sitharaman is expected to outline details of this plan as well as investment in agriculture and other sectors that can be drivers of growth. Markets will also be looking for how much capital the government will inject into state-owned banks after a massive 1.06 trillion rupees plan last year.
“Now that elections are over and the country has given an unambiguous verdict, this budget should take some hard decisions towards initiating a host of structural reforms that would trigger off corporate investment,” said Partha Ray, a professor of economics at the Indian Institute of Management in Kolkata.