The saved stimulus of PM Modi is unlikely to revive growth

NEW DELHI: It is unlikely that the new Budget of Finance Minister Nirmala Sitharaman will take the third largest economy in Asia out of its worst slowdown in more than a decade, as the government proposed only moderate and small increases in spending cuts in personal taxes, economists said Sunday.

They said there was a risk that the government would not reach its fiscal deficit target for 2020-21, as it depended on raising almost $ 30 billion from the sale of stakes in state-owned companies and financial institutions to meet ambitious revenue targets.

In its Budget for the year that began in April presented on Saturday, the government relaxed its fiscal deficit objective to be able to spend almost $ 15 billion more, mainly on infrastructure and agriculture, while progressing with privatizations.

Economists and industry leaders said the Budget proposals would provide some support for long-term growth, but that they were not enough to give it immediate impetus.

India's economy is forecast to grow 5% in the year ending March, its weakest pace in 11 years, which increases pressure on Prime Minister Narendra Modi, who is already facing a violent reaction to a law on socially divisive citizenship.

We believe that the Budget is largely neutral for growth and inflation, said economist Nomura Sonal Varma, adding that financial sector problems could further delay any recovery. The government has proposed increasing spending to boost consumer demand and investment, but it could not go far enough because a slowdown in revenue fell on its hands, economists said.

The rating agency Moody’s Investor Service said the Budget highlighted the fiscal challenges of slower real and nominal growth, which may continue longer than the government expects.

Nomura said the annual growth of gross domestic product (GDP) probably fell to 4.3% in the last three months of 2019, after falling to 4.5% the previous quarter, the slowest in more than six years.

Economists said India was risking losing its budget deficit target of 3.5% of GDP in 2020-21, as the government's revenue growth target of almost 10% depends on raising almost Rs 2.1 lakh crore ($ 30 billion) of privatizations.

The budget also disappointed investors and consumers, as no new incentives were offered for the besieged financial sector and the housing market, although it was not clear whether the proposed changes to individual taxes would result in net profits.

Tax cuts will not translate into many benefits for taxpayers, said Amit Maheshwari, a partner, Ashok Maheshwary&Associates LLP, a tax consultant, adding that they could discourage savings and help raise market interest rates.

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The stock market fell to its lowest level in more than three months in a special trading session on Saturday after the publication of the Budget, abolished by what analysts said was a lack of sufficient stimulus measures.

The NSE Nifty 50 index closed 2.5% lower, while the reference S&P BSE sensex fell 2.4%.

Speaking to reporters on Sunday, Sitharaman said investors would soon appreciate the steps taken to boost growth, as she had tried to balance fiscal discipline with additional spending, while giving concessions to taxpayers.

The government expects growth to increase to 6% to 6.5% in 2020-21, which will help India move towards its goal of becoming a $ 5 billion economy by 2025, almost $ 2.9 billion now.

Many taxpayers lamented on social networks that the budget was largely favorable to companies, as it exempted companies from paying taxes on dividends, in addition to a September cut in corporate tax rates to 22% of more than 30% for existing companies.

Dividend recipients will now be subject to taxes, which will increase the burden on high-income taxpayers. Sitharaman said the government will issue clarifications on tax cuts soon and can infuse more funds into state banks, if necessary.

Analysts also said that the government’s greater dependence on loans could displace private investments and push up government bond yields, offsetting the gains from the recent easing of monetary policy.

The Reserve Bank of India (RBI) has reduced its benchmark reference rate by 135 basis points since last year, but borrowed banks have not fully transferred the benefits to borrowers.

The RBI monetary policy committee will meet on February 6 and most economists expect it to keep rates unchanged after the recent rebound in retail inflation, while indicating the possibility of a reduction in the future.