India makes no changes to taxes
Indian Prime Minister Narendra Modi’s government resisted the temptation of spending trillions of rupees on schemes for the poor in its last budget before an election and instead stuck to fiscal consolidation to attract investors.
The lack of social spending largesse indicates Modi’s confidence in returning to power for a rare third term. His stratospheric approval ratings have been further boosted by building a grand Hindu temple on long-disputed land that appealed to his nationalist base.
Tax policies were left unchanged in Thursday’s budget, significant subsidies on food, fertilizer, and fuel were 8% lower, and an allocation for a rural employment scheme was steady.
“This indicates that the ruling BJP (Bharatiya Janata Party) is feeling fairly confident about securing another big victory in the upcoming general election,” said Shilan Shah from Capital Economics.
A national election is due by May this year.
India will reduce its budget gap sharply in 2024-25 to 5.1% of gross domestic product (GDP), Finance Minister Nirmala Sitharaman told parliament as she presented the budget while revising the current fiscal year’s gap lower by 10 basis points to 5.8%.
“In this budget, capital expenditure has been raised to a historic high of 11.11 trillion rupees ($133.90 billion) while maintaining the fiscal deficit. In terms of economists, this is a sweet spot,” Modi said after the budget presentation.
Economists said fiscal consolidation will help the Indian government make a stronger case for a higher sovereign credit rating in the coming months.
S&P and Fitch rate India at BBB-, while Moody’s rates the South Asian country at Baa3, the global ratings agencies’ lowest investment grades.
“The interim budget effectively juggled the need to support growth while signaling continued fiscal consolidation. This will be reassuring for investors and rating agencies alike,” said Sachchidanand Shukla, economist at Larsen & Toubro.
However, Moody’s said after the budget that India has not seen a significant enough improvement in debt affordability to warrant a rethink of its sovereign ratings.
The agency said the government has to take “proactive” measures for revenue generation to meet the fiscal deficit target of 4.5% of GDP in 2 years.
Sitharaman, in a press conference after the budget, said the rating agencies should take on board its efforts to lower the fiscal deficit.
“Not only aligning with the fiscal consolidation roadmap that we gave earlier but bettering it, that is one simple, straightforward message which every rating agency should take on board,” she said.
Over the last three years, the government has increased spending on roads, bridges and other infrastructure to boost the economy and create jobs.
The budget foresees increased capital expenditure on such long-term projects by another 11% over last year, even as the government’s overall spending rises at a slower rate of 6%.
The pace of increase in capital spending is lower than in the previous year.
The federal government will also provide 1.3 trillion rupees in long-term loans to states to spend on infrastructure.
There are weak spots in the economy, though.