India Fiscal


Modi delivers pragmatic, albeit lackluster budget for FY 2015/16

Nine months after Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) achieved an overwhelming election victory as a result of a campaign centered on deregulating business and fostering foreign direct investment, the government presented its first full-year budget on 28 February. While the USD 290 billion budget for FY 2015/16 fell short of sky-high expectations for large reforms, it included a number of positive policy announcements focused on boosting economic growth and creating a more business friendly-environment. Overall, the budget signaled the government’s commitment to achieving high economic growth rates, while pushing the pace of fiscal consolidation back slightly.

One of the budget’s main, and largely-expected, highlights was the planned increase in spending on infrastructure and defense. The government increased spending targets to 2.5% of GDP, up from last year’s 1.9% of GDP. The quality of country’s infrastructure is poor and greater expenditure on roads and railways is badly needed to jumpstart the economy. In this regard, Finance Minister Arun Jaitley stated that five ultra-mega power projects will be constructed to ease India’s chronic energy shortages. Notably, Jaitley announced that only part of the increased infrastructure expenditure would be financed directly from the budget; the rest will come from public sector undertakings and other internal sources. To fill part of this funding gap, the government announced that it would launch tax-free infrastructure bonds, as well as establish a National Investment and Infrastructure Fund. Successful implementation and financing will be key going forward.

Another positive aspect of the budget are the policies aimed at improving the ease of doing business and monetizing taxes. Jaitley emphasized the government’s commitment to implementing the upcoming Goods and Services Tax (GST) in April 2016 as well as creating more transparent and simplified tax laws moving forward. The government pledged to gradually reduce the corporate tax rate from 30% to 25% over the next four years and to remove some of the current exemptions. In addition, a modern bankruptcy law was tabled and a law against black money was outlined which, if successful, could reduce tax evasion. The government also outlined a number of proposals to encourage savings, such as tax incentives for payments toward pensions and insurance premiums.

Yet, despite all the increased dynamism and reforms Modi’s government pledged, Jaitley failed to deliver in a few areas. In particular, he failed to outline a comprehensive roadmap on how to reform India’s subsidy schemes, which account for 1.6% of GDP. The subject is politically unpopular, which may explain its absence from the budget. In addition, the government pushed back its target of lowering the deficit to 3.0% of GDP from FY 2016/2017 to FY 2017/2018. For FY 2015/2016, the government is targeting a fiscal deficit of 3.9%, up from the previous 3.6% target expected in the FY 2014/2015 budget. Radhika Rao, Economist at DBS adds:

Overall, the improved expenditure mix and realistic revenue assumptions bode well for the FY 15/16 fiscal position. What is lacking is a clearer timeline to lower subsidies, optimistic privatization and indirect tax targets. Any disappointment on the growth front and / or a rebound in fuel prices could add to the stress on the fiscal books.

Against this backdrop, FocusEconomics Consensus Forecast panelists’ foresee a fiscal deficit of 4.1% for FY 2015/2016, which is down 0.1 percentage points from last month’s forecast. For 2016/2017, the panel expects a deficit of 3.8%.

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