Prime Minister Narendra Modi delivered a pro-growth budget for the coming year, with a wider deficit projection, in an effort to boost Asia’s third-biggest economy while retaining subsidy payments for the nation’s poor.
The shortfall will narrow to 3.9 percent of gross domestic product (GDP) in the year starting April 1, the smallest gap since 2008 but higher than a previous goal of 3.6 percent, Finance Minister Arun Jaitley told lawmakers on Saturday. He also cut corporate taxes and increased infrastructure spending.
“People who urge us to undertake big bang reforms also say the Indian economy is a super giant that moves slowly but surely,” Jaitley said. “Even our worst critics would say we have moved rapidly.”
Yet to come is the assessment of central bank Governor Raghuram Rajan, who said before the budget that he wants “high-quality fiscal consolidation” to further lower one of Asia’s highest interest rates. Jaitley said that slower inflation should trigger more monetary easing.
The additional spending could help cement India’s position as a leading growth driver among emerging markets as China’s economy slows.
At the same time, Modi avoided taking stronger steps to curtail subsidies in his first-full year budget after a loss in a Delhi state election showed the political support he enjoyed last year can’t be taken for granted.
“All in all it’s a decent budget, but there are no fireworks,” said Devika Mehndiratta, a Singapore-based economist with Australia and New Zealand Banking Group Ltd. “I had expected the Modi government, given their strong mandate, to at least present a road map for politically sensitive measures like tackling fertilizer subsidies.”
The S&P BSE Sensex, open for trading on a Saturday for the first time in at least 16 years, gained 0.5 percent in volatile trading. The rupee and bond markets are shut.
The budget “will further reignite our growth engine, signaling the dawn of a prosperous future,” Modi said on Twitter after the speech.
Jaitley said the budget deficit for the 12 months through March 31 will be 4.1 percent as targeted and fall to 3 percent in the year through March 2018. In July he said he’d narrow the fiscal deficit to 3.6 percent of GDP in the 12 months through March 2016 and 3 percent a year later.
The pro-growth budget means that India’s sovereign rating hinges on whether the country’s competitiveness improves, according to Atsi Sheth, the senior vice president for sovereign risk at Moody’s Investors Service.
“The budget underscores our view that government finances are likely to remain a constraint on India’s sovereign credit profile,” she wrote. “Fiscal consolidation appears difficult to achieve even by a government with a considerable parliamentary majority and during a period of accelerating economic growth.”
Crude oil prices have fallen more than 40 percent since June, allowing Asia’s third-biggest importer of the fuel to scrap diesel-price controls and increase tariffs of local natural gas.
Modi is expanding the use of biometric cards and direct cash transfers to ensure benefits go to the 59 percent of Indians who live on less than $2 per day.
Modi didn’t take further steps on Sunday to wind up fertilizer, cooking gas and liquid petroleum gas subsidies. Jaitley repeated pledges to provide homes, toilets and electricity for India’s 1.2 billion people by 2022, which would be the 75th anniversary of the country’s independence.
Image credits: AP/Mahesh Kumar A.