Feb 2: Prime Minister Narendra Modi’s second budget in seven months disappointed investors who were hoping for big-bang stimulus to revive growth in Asia’s third-largest economy.
The fiscal plan -- delivered by Finance Minister Nirmala Sitharaman on Saturday -- proposed tax cuts for individuals and wider deficit targets but failed to provide specific steps to fix a struggling financial sector, improve infrastructure and create jobs. Stocks slumped as a proposal to scrap the dividend distribution tax for companies failed to impress investors.
"Far from being a game changer, the budget provides little in terms of short-term growth stimulus,” said Priyanka Kishore, head of India and South East Asia economics at Oxford Economics Ltd. in Singapore. “While income tax cuts will provide some relief on the consumption front, the multiplier effect is low and the overall stance of the budget is not expansionary."
India has gone from being the world’s fastest-growing major economy three years ago, expanding at 8%, to posting its weakest performance in more than a decade this fiscal year, estimated at 5%.
While the government has taken a number of steps in recent months to spur growth, they’ve fallen short of spurring demand in the consumption-driven economy. Saturday’s budget just added to the glum sentiment.
Okay Budget
“It’s an okay budget but not firing on all cylinders that the market was hoping for,” said Andrew Holland, chief executive officer at Avendus Capital Alternate Strategies in Mumbai.
The government had limited scope for a large stimulus given a huge shortfall in revenues in the current year. The slippage induced Sitharaman to invoke a never-used provision in fiscal laws, allowing the government to exceed the budget gap by 0.5 percentage points. The result: the deficit for the year ending March was widened to 3.8% of gross domestic product from a planned 3.3%.
On Friday, India’s chief economic adviser Krishnamurthy Subramanian said reviving economic growth was an “urgent priority” and deficit goals could be relaxed to achieve that. The adviser’s Economic Survey estimated growth will rebound to 6%-6.5% in the year starting April.
The fiscal gap will narrow to 3.5% next year, as the government budgeted for gross market borrowing to rise marginally to 7.8 trillion rupees from 7.1 trillion rupees in the current year. A plan to earn 2.1 trillion rupees by selling state-owned assets in the year starting April will also help plug the deficit.
Total spending in the coming fiscal year will increase to 30.4 trillion rupees, representing a 13% increase from the current year’s budget, according to latest data.
Key highlights from the budget:
* Tax on annual income up to 1.25 million rupees pared, with riders
* Dividend distribution tax to be levied on investors, instead of companies
* Farm sector budget raised 28%, transport infrastructure gets 7% more
* Spending on education raised 5%
* Fertilizer subsidy cut 10%
Analysts said the muted spending plan to keep the deficit in check will lead to more downside risks to growth in the coming months.
“It is very doubtful that the increase in expenditure will push demand much,” Chakravarthy Rangarajan, former governor at the Reserve Bank of India told BloombergQuint, adding that achieving next year’s budget deficit goal of 3.5% of GDP was doubtful.
With the government sticking to a conservative fiscal path, the focus will now turn to central bank, which is set to review monetary policy on Feb. 6. Given inflation has surged to a five-year high of 7.35%, the RBI is unlikely to lower interest rates.
What Bloomberg’s Economists Say:
The burden of recovery now falls solely on the Reserve Bank of India. With inflation breaching RBI’s target at present, any rate cuts by the central bank are likely to be delayed and contingent upon inflation falling below the upper end of its 2%-6% target range.
-- Abhishek Gupta, India economist
Governor Shaktikanta Das may instead focus on unconventional policy tools such as the Federal Reserve-style Operation Twist -- buying long-end debt while selling short-tenor bonds -- to keep borrowing costs down.
Comments
Absolutely I am agreed the comments with Mr. Suldan Jeddah.
NRI tycoons of Mangalorean should be concentrating on establishing educational institutions with hostel facility especially for women with their dress code. Really it was needed of hours.
The Principal there is a sanghi. Although to be fair to her, she doesn't tolerate anything. A few years ago, she had irritated a student holding the Ayyappa vrata. Looks like she is trying to impose RSS discipline in the college.
On the first place, action against such culprit institutions is need of the time for not circulating norms of dress code of its institution on time, and then snatching the relegious freedom.
This head scarfs .... Burqha has been taken for GRANTED by this students...... you can see all the so called religious Girls.... In Movie theatre.... coffeeshop ..... restaurants... parks.... hotels ..... malls..... Romancing and dating while hiding their Identety ...... 60% of the Restaurants.. coffee shops and parks with this people..... Parents or family memebrs wont even aware of their children doing all this ...
My humble request to NRI tycoons including CD boss to establish more and more educational institutions in Mangaluru and allow people of different faiths to follow their dress code. This is need of the hour. Kindly stop dumping money to gutter by organizing cricket tourneys.
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