India Stocks Fall as Country Slashes Taxes, Widens Budget Deficit
Finance Minister Nirmala Sitharaman presents the Union Budget 2020-21 in the Lok Sabha, in New Delhi. (Source: PTI)

India Stocks Fall as Country Slashes Taxes, Widens Budget Deficit

(Bloomberg) -- India’s finance minister slashed taxes for individuals, scrapped a levy on dividends and widened budget deficit targets to help spur a slowing economy. The measures failed to cheer investors.

The government will miss its deficit goals for a third year, pushing the shortfall to 3.8% of gross domestic product from a planned 3.3% in the year ending March, Finance Minister Nirmala Sitharaman said in Parliament in New Delhi Saturday. The deficit target for the coming fiscal year starting April 1 was widened to 3.5%.

India Stocks Fall as Country Slashes Taxes, Widens Budget Deficit

Personal income tax rates for individuals were lowered as part of a goal to lift consumption in an economy that’s set to grow 5% this fiscal year, the weakest pace in more than a decade.

The tax measures, which carried riders, fell short of investors’ expectations with many hoping for a larger boost to the economy. Local stocks dropped, with the benchmark S&P BSE Sensex index plunging 2.4%, its biggest drop in more than three years. The bonds and currency markets were shut.

“This is a budget to boost incomes and enhance purchasing power,” Sitharaman said at the beginning of a speech that lasted more than two and a half hours.

Economists were muted in their reaction to the fiscal plan, which proposed levying a dividend distribution tax on investors instead of companies, and announced abolishing some tax exemptions.

“It is not a full-frontal fiscal stimulus that the markets were hoping for,” said Rini Sen, an economist at Australia & New Zealand Banking Group Ltd. in Bengaluru.

India Stocks Fall as Country Slashes Taxes, Widens Budget Deficit

Sitharaman used a provision in fiscal laws to enable the government to breach a mandated goal to bring the deficit down to 3% of GDP by the year ending March 2021.

The minister’s top adviser on Friday urged her to relax the deficit goal for the current year, saying reviving economic growth was an “urgent priority.” The adviser’s Economic Survey, a report that Sitharaman presented to lawmakers on Friday, estimates growth will rebound to 6%-6.5% in the year starting April.

Tax cuts for individuals, outlined below, will cost the government 400 billion rupees ($5.6 billion) in revenue, the minister said:

Annual IncomeNew Tax RatePrevious Tax Rate
500,000 rupees to 750,000 rupees10%20%
750,000 rupees to 1 million rupees15%20%
1 million rupees to 1.25 million rupees20%30%
1.25 million rupees to 1.5 million rupees25%30%
above 1.5 million rupees30%30%
Note: New tax rates will only apply to those forgoing exemptions

“Overall, we see the budget as largely neutral for short-term growth,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. in Singapore.

The deficit will be funded by record market borrowing of 7.8 trillion rupees in the coming year. The government also plans to give foreign investors greater access to the nation’s debt, a move seen as a precursor to getting its securities included in global bond indexes.

India Stocks Fall as Country Slashes Taxes, Widens Budget Deficit

Moody’s Investors Service said the budget highlights the challenges to fiscal consolidation. India’s government debt is already “significantly higher” than the average for its Baa-rated peers, said Gene Fang, associate managing director of sovereign risk.

“Sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve,” he said. “The government also has limited room to reduce expenditures without further weakening growth.”

What Bloomberg’s Economists Say:

Sitharaman’s decision to embark on budget consolidation for fiscal 2021 at a time when the economy is experiencing the worst growth slump in over a decade signals a slow and prolonged path for growth recovery. In our view, expenditure and monetary conservatism over the past few years has itself led the economy into a vicious cycle of weak growth, low tax collections and breaching of deficit targets.

-- Abhishek Gupta, India economist

Click here to read the full report.

Sitharaman said the budget was based around three main themes: an “aspirational India, economic development for all and a caring society.”

Here are some other highlights of her speech:

  • Markets: Abolishing dividend distribution tax for companies will entail a revenue loss of 250 billion rupees
  • Financial sector: The government will sell its stake in IDBI Bank Ltd. and list state-owned Life Insurance Corp. of India on the stock exchange
  • Excise duties: Tax on cigarettes and other tobacco products to be increased
  • Infrastructure: Transport infrastructure to be allocated 1.7 trillion rupees; a sum of 3.6 trillion rupees earmarked for piped water projects; power, renewable energy sector to get 220 billion rupees

©2020 Bloomberg L.P.

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