Narendra Modi once promised to bring faster growth, more jobs and “acche din” — or good days — to India’s young, aspirational population. But today India is in the grip of its most severe economic slowdown in decades, with six consecutive quarters of sliding growth, widespread layoffs, squeezed incomes and deepening public gloom.
That is why Nirmala Sitharaman, India’s finance minister, will be under pressure on Saturday when she unveils India’s budget for the next financial year — which starts on April 1.
Economists will be trying to assess whether New Delhi will be able to revive faltering growth and how it will balance call for economic stimulus with its commitment to pare the fiscal deficit.
Here are five things to watch:
Fiscal stimulus
New Delhi’s long-term fiscal consolidation plan calls for it to trim its fiscal deficit to 3 per cent of gross domestic product by March 2021. But with analysts predicting that this year’s target is certain to be missed, most expect some relaxation of next year’s target too — to create space for much-needed stimulus.
“When the private sector economy is in such bad shape, it does make a great deal of sense for any government to spend,” says Ritika Mankar, chief economist at Ambit Capital.
The question is how far New Delhi will let its target slip and whether the budget offers a more realistic fiscal consolidation plan for the future.
Tax breaks
India unveiled $20bn in corporate tax cuts in September to spur new investment. Now middle-class Indians are hoping for a cut in their personal income taxes which would spur flagging domestic consumption. Some media reports suggest the threshold for paying income tax could be raised as high as $10,000 a year.
Yet economists are sceptical about the benefits of a move, given that only 3 per cent of the population pays income tax. It is likely, economists warn, that the beneficiaries will simply save their extra money rather than spending it, given the economic uncertainty..
Populist spending measures
New Delhi is expected to unveil measures to get more money to the rural poor, who have a high propensity to spend. Analysts say it is critical for this largesse to be structured in a way to ensure money reaches the poorest. But there are concerns that measures taken to overcome the current slowdown could become a long-term burden on public finances.
“These fiscal giveaways are very easy to roll out, but they are not so easy to roll back,” says Sunil Sinha, principal economist at India Ratings and Research. “Even if they take the cost of allowing the fiscal deficit to move up, do they also come up with a game plan that when the GDP picks up, you start rolling back?”
More protectionism
For decades, India steadily cut import duties as it abandoned its old socialist orientation and moved towards a more globalised, market-oriented economy. But Mr Modi’s administration has reversed that course, raising import duties on a range of items including components used in manufacturing and consumer goods such as toys and microwave ovens.
Indian media are speculating that the budget will increase import tariffs on as many as 50 items to curb what it considers “unnecessary” imports and to promote more domestic manufacturing.
Long-term structural reforms
Mr Modi’s administration has taken tough, controversial decisions in pursuit of its divisive Hindu nationalist sociopolitical agenda. But many industrialists lament the lack of a similar resolve to pursue economic reforms that would tackle long-term constraints to growth. Many are longing for the budget to lay out a vision of a new reform agenda to strengthen India’s economy in the long-run.
Source: Economy - ft.com
