Budget can increase spending to combat the drop in growth

NEW DELHI: The government of Prime Minister Narendra Modi will announce a budget that is expected to cut taxes on businesses and increase spending in an attempt to shore up consumption and weaken economic growth .

Analysts say that Modi, driven by a major electoral victory, hopes to use the budget to restart the reforms and face a series of economic problems.

In January-March, annual growth plummeted to 5.8%, the slowest pace in 20 quarters. The growth for the financial year that ended in March was 6.8%, also a minimum of five years, and indicators such as the fall in industrial production and automobile sales have stoked fears of a deeper deceleration.

A deficit in monsoon The rains, which are crucial for the agricultural sector that employs almost half of the workers in India, have raised concerns of rural distress and have strengthened the case of intervention, said a leader of the ruling Modar Bharatiya Janata Party (BJP). ).

The objective of the budget will be to boost domestic consumption, address the rural crisis and support small-scale manufacturers, Gopal Krishna Agarwal, BJP's economic affairs spokesperson, told Reuters.

Shilan Shah, of Capital Economics in Singapore, said in a note: Given the recent economic slowdown, the finance Minister it is likely to announce more accommodative taxes and spending measures.

In February, then- finance Minister Piyush Goyal presented an interim budget for the year that began on April 1, to maintain the functions of the government while a week-long election was held.

Great investment plans

On Friday, Nirmala Sitharaman will submit a full-year budget that Agarwal said could reduce corporate taxes for small and medium-sized businesses, as well as personal ones, to revive middle-class consumption that gave Modi a second term, while withdrawing some exemptions fiscal.

In 2018, the government reduced the corporate tax rate to 25% from 30% for companies with an annual turnover of 250 million rupees ($ 36.3 million) or less.

Following the electoral promises, the government could present a plan to invest up to Rs 100 lakh crore ($ 1.45 billion) in highways, railways and ports, while the budget of Rs 25 lakh crore to increase agricultural productivity for five years, said the BJP officials.

To meet the required funds for all this, it is possible that Sitharaman should increase the February target of 3.4% for the fiscal deficit to gross domestic product to 3.6%, said a senior government official.

A Reuters poll showed that economists had expected a target of 3.5%.

Sitharaman is also likely to seek a bigger dividend from the central bank, draw up plans to raise funds from a 5G telecommunications auction and propose further privatization, the sources said.

After becoming prime minister in 2014, Modi improved public finances, cutting the fiscal deficit to 3.4% from 4.5% in 2013/14, mainly through cuts in subsidies and higher retail taxes on fuel.

However, he is now under pressure to loosen the strings of the purse to fulfill the electoral promises and increase the rate of growth.

Fall of rural demand

A large part of the economy faces a recession with a drop in rural demand and private investments, said Ashwani Mahajan, head of the Rashtriya economic wing Swayamsevak Sangh, the ideological matrix of the ruling group Modi.

It is the right time to expand the fiscal deficit to 4% of GDP, he said, adding that the budget could provide fiscal incentives for food processing, logistics and small businesses, as well as for affordable housing.

Private investment in India increased 7.2% annually in January-March, compared to 8.4% in the previous quarter. The growth of capital investment slowed to 3.6% from 10.6%.

Economists expect spending to increase as the government plans to expand cash benefits for farmers and inject more funds to state banks, loaded with nearly $ 150 billion in stressed assets, to back loans.

Modi has set an ambitious goal of turning India into $ 5 trillion over the next five years, from $ 2.7 trillion, which will require an annual growth rate of more than 10%, economists said.

But that will require a large second wave of reforms that Modi refused during his first term, economists say. To unlock the potential and growth in a more solid way, from his point of view, India needs to facilitate the acquisition of land and modify the labor laws that hinder the hiring and dismissal of workers.

BJP’s Agarwal says the budget speech “will lay a roadmap of economic reforms for the next five years, with an objective of boosting economic growth .”