India Surprises by Lowering Budget Gap Despite Weak Growth
(Bloomberg) -- India’s new finance minister surprised most analysts by narrowing the budget deficit target even though the economy is in need of a stimulus after slowing to a five-year low.
The fiscal gap for the year that began on April 1 is estimated at 3.3% of gross domestic product, down from 3.4% set in February’s interim plan, Finance Minister Nirmala Sitharaman said in her maiden budget in Parliament in New Delhi on Friday.
The government plans to increase taxes on the wealthy, sell stakes in state-run companies and increase dividends from the central bank in order to boost revenue and bring down the deficit. It will also sell its first global bond to raise funding for infrastructure spending.
“Those in the highest income brackets need to contribute more to the nation’s development,” Sitharaman said. The effective tax rate for individuals with taxable annual income above 20 million rupees ($290,000) will increase by about 3%, and for those earning above 50 million rupees it’ll climb 7%.
India’s benchmark 10-year bonds dropped 8 basis points to 6.67% while the rupee gained.
Prime Minister Narendra Modi, who returned to office in May following a landslide election victory, is under pressure to revive consumption and investment after latest data showed growth slipping to a five-year low 5.8% in the three months to March.
“Clearly India is not loosening the purse and yet there’s all this talk about boosting infrastructure,” said Prakash Sakpal, Asia economist at ING Groep NV in Singapore. “There is a bit of a misplaced assumption about how are we going to get growth going up when there isn’t enough spending.”Sitharaman said the nation needs 20 trillion rupees annual investment on infrastructure, and the government will be tapping the overseas bond market for funds.
GDP growth is forecast to rebound to 7% in the current fiscal year from 6.8% last year, the Finance Ministry said in a report on Thursday, mirroring a projection from the Reserve Bank of India. The central bank has cut interest rates three times this year to spur growth.
Sitharaman, previously India’s defense minister, exempted some defense equipment from a basic customs levy. She also said the government would allow more foreign investment in the insurance and media industries.
Here’s a look at other highlights in the budget:
The government will receive 1.06 trillion rupees in dividends from the central bank and other lenders, while raising 1.05 trillion rupees from asset sales.
Total spending for the fiscal year is estimated at 33.2 trillion rupees, compared with 34 trillion forecast in the interim plan. The total borrowing plan was left unchanged at 7.1 trillion rupees.
The government is providing 750 billion rupees for a new measure to support farmers and 700 billion rupees in capital support to state-run banks.
The customs duty on gold was increased to 12.5% from 10%. The minister also proposed adding an excise duty of 1 rupee per liter each on diesel and gasoline.
Companies with revenue of up to 4 billion rupees a year will be taxed at the 25% rate. The GST rate on electric vehicles will be lowered to 5%.
©2019 Bloomberg L.P.