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Despite a bruising slowdown, India goes for a cautious annual budget

India’s Finance Minister Nirmala Sitharaman holds budget papers during a photo opportunity as she leaves her office to present the federal budget in the parliament…
  • Niharika Sharma
By Niharika Sharma

Reporter based in New Delhi.

Published Last updated This article is more than 2 years old.

Budget 2020 was widely expected to be a display of the Narendra Modi government’s resolve to foster economic growth, despite being constrained by fiscal deficit targets. In the end, it seems to have balanced the two.

Presenting her second union budget today (Feb. 1), Nirmala Sitharaman offered income tax doles to tax-payers in an attempt to boost their purchasing power and lift consumption.

There was also a substantial infrastructure spending push. “Rs100 lakh crore ($1.4 trillion) would be invested on infrastructure over the next five years,” Sitharaman said.

A jumbo Rs1.7 lakh crore was allotted to transport infrastructure, with plans for 100 new airports by 2024 under the regional connectivity scheme UDAN, high-speed trains, 2,500 km of highways, 9,000 km of economic corridors, and 2,000 km of coastal roads.

For the struggling rural sector, she allotted Rs2.83 lakh crore, besides announcing a 16-point action plan that includes doubling farmers’ income by 2022, special trains and flights for easy transportation of perishable farm produce, and strengthening of shadow banks.

The hope is that these measures will boost GDP growth from an 11-year low of 5% in financial year 2020 to between 6% and 6.5% next year.

However, financial markets seemed unimpressed—the benchmark BSE Sensex dived nearly 1,000 points (2.4%).

“There were no big bang agricultural reforms, which is disappointing, but the 16 proposed initiatives should have a positive impact on the agritech startup ecosystem,” said Mark Kahn, managing partner at the Mumbai-based venture capital firm Omnivore.

Some leeway

The finance minister relaxed fiscal deficit targets but there was no profligacy.

Fiscal deficit, the gap between expenditure and revenue, for the financial year 2020 will now stand at 3.8% of the GDP, a 0.5 percentage point slippage over the original estimate of 3.3%. Next year, too, there will be a deviation: 3.5% as against the projected 3%.

The higher deficit this year is mainly on account of lower revenues owing to the slowdown and receipts forgone (Rs1.45 lakh crore) following the corporate tax cut announced last September.

The budget announced a new, optional income tax regime, amounting to a further revenue dent. “The new personal income tax rates will entail estimated revenue forgone of Rs40,000 crore per year,” said Sitharaman.

There was also a removal of the dividend distribution tax (DDT) levied on companies when they pay dividends to shareholders. This will lead to an additional loss of Rs20,000 crore.

The finance minister, however, was mindful of the fiscal deficit widening too much. Revenue mop-up measures such as the initial public offer of insurance giant Life Insurance Corporation of India (LIC) were announced.

“Fiscal deficit target and nominal GDP target (10% in financial year 2021) seem to be practical,” said Shashank Khade, co-founder and director, of the Bengaluru-based investment advisory firm Entrust Family Office. “While the government has missed an opportunity to provide a near-term impetus to an economic revival, the lack of negative surprises will go down well with stock markets in the medium term,” he added.

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