India's new finance minister will be presenting her first budget. Here's what to expect

India's new finance minister will be presenting her first budget. Here's what to expect

July 5, 2019
  • India's newly appointed finance minister, Nirmala Sitharaman, is set to present a full-year budget on Friday, following the recent parliamentary elections where Prime Minister Narendra Modi won a decisive victory.
  • Analysts said they expect Sitharaman to announce a budget that will aim to boost consumption demand, revive the investment climate and support social welfare programs — but it will not likely stray too far from the government's fiscal deficit targets.
  • India's economy has significantly slowed down in recent months and unemployment is at a 45-year high.

India's newly appointed finance minister, Nirmala Sitharaman, is set to present a full-year budget on Friday, following the recent parliamentary elections where Prime Minister Narendra Modi won a decisive victory.

The budget will cover the remainder of the fiscal year that started April 1, 2019 and run until March 31, 2020. Earlier in February, before India headed to the polls, Modi's government had presented a interim budget where it poured money to support farmers and bolster rural job creation.

Analysts said they expect Sitharaman to announce a budget that will aim to boost consumption demand, revive the investment climate, support social welfare programs — but it will not likely stray too far from the government's fiscal deficit targets.

India's economy has significantly slowed down in recent months. Between January and March, annual growth declined to 5.8% — the slowest pace in 20 quarters. For the fiscal year that ended in March, the economy expanded at a five-year-low of 6.8%.

Some high frequency indicators — such as industrial output data and auto sales numbers — have suggested the slowdown could be more severe than previously predicted. Making matters worse, unemployment is at a 45-year high.

"Expectations are running high for pro-consumption effort and extended emphasis on the welfare framework," Radhika Rao, an economist at Singapore's DBS Group, wrote in a Monday note.

There's pressure on the government to"keep expenditure growth robust, reduce taxes and encourage rural reflation," Sonal Varma, managing director and chief economist for India and Asia ex-Japan at Nomura, said in a Tuesday note. Reflation refers to measures designed to expand a country's output — they include things like reducing taxes and lowering the cost of borrowing.

According to the latest economic survey released on Thursday, revenue collected from taxes fell short of estimates during the last fiscal year, which ended in March 2019. The report showed that while direct taxes grew by 13.4% due to an improvement in corporate tax collection, indirect levies fell short by about 16% due to a decline in Goods and Services Tax (GST) revenues.

As such, Sitharaman will have to find a way to make resources available to fund various welfare programs without raising the tax burden on the populace — higher taxes tend to dampen consumer demand.

Local media reports cited sources familiar with the matter and said Friday's budget may increase the personal income tax threshold for some individuals.

Nomura's Varma pointed out that the government may need to scale down its revenue targets outlined in February's interim budget in order to"maintain credibility."

During the election campaign, Modi's BJP placed a lot of emphasis on infrastructure investments.

Analysts said they expect the government's focus to remain on the infrastructure sector.

"In its first term, the government had significantly increased budgetary allocation towards infrastructure-related ministries," Citi analysts wrote in a Monday note. "However over the last two years, growth in budgetary allocation to (infrastructure) moderated and was replaced by off-balance-sheet financing."

The analysts said that while the road sector had been the biggest beneficiary in the past, the focus will likely shift toward power and railways in this budget.

"Reviving the investment climate is of paramount importance, which has been moderating for the past (five to six) years," DBS Group's Rao said, explaining that the government's infrastructure spending in recent years had led to a recovery in the investment environment.

Farmers were the big winners in the interim budget. The government allocated 600 billion rupees ($8.75 billion) for a rural jobs program and 190 billion rupees for building roads in the countryside, where two-thirds of Indians live. Modi had also pledged to spend around $359 billion in farm and rural productivity and provide income support to farmers.

Low crop prices, a delayed monsoon, rising costs and higher debt levels have worsened the strain on Indian farmers.

Sitharaman is expected to address"economic hardship in rural areas, even though this proved to be less damaging for Modi in the election than expected," Akhil Bery, South Asia analyst at Eurasia Group, wrote in a Wednesday note. He explained that the BJP has its eyes on key state elections in Haryana, Maharashtra and Jharkhand later this year where the rural vote will be pivotal.

"We expect the government to reiterate its commitment towards social security, reducing the cost of agri-credit, agri-marketing and irrigation," Nomura's Varma added.

The market is likely to keep an eye on how the government plans to tackle an ongoing crisis in India's shadow banking sector, after recent budgets provided support to recapitalize heavily-indebted public sector banks.

Analysts have said that there's a major liquidity problem for India's non-banking financial companies — if that problem festers, it may turn into a solvency issue where those firms would struggle to meet long-term debt and financial obligations.

Still, direct government intervention may not be forthcoming, according to Varma.

"While there are concerns about the shadow bank liquidity crisis, we would not expect any direct intervention, instead incentives may be offered to boost housing demand," she said.

Overall, India watchers will also look out for the government's fiscal deficit target and whether it will be able to stick to the 3.4% benchmark set for the financial year 2020.

"Worry is that some slippage in deficit targets is on the cards when the (fiscal 2020) math is presented," said Rao from DBS. "We, however, see lower odds of a sizeable miss in the target, even if underlying assumptions seem optimistic."

Reuters contributed to this report.

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