India’s Hindu nationalist-led government pledged 750 billion rupees ($10.56 billion) to support farm incomes and reduced the tax burden for middle class voters on Friday, hoping to refind favor with its last budget before a general election.
Prime Minister Narendra Modi is facing discontent over depressed farm incomes and doubts over whether his policies are creating enough jobs.
With opinion polls suggesting that Modi’s Bharatiya Janata Party (BJP) could lose its parliamentary majority in an election that must be held by May, the government delivered a budget to shore up support in the countryside, where two-thirds of Indians live, and among the urban, salary-earning middle class.
The interim budget for 2019/2020 offered direct cash support to poor farmers and allocated more funds for a rural jobs guarantee scheme and rural development, like building roads and homes.
Vying with an opposition that has also trumpeted budget-straining populist plans to win support from poorer voters, the government said it would launch a pension scheme for people working in India’s vast unorganized sector.
The budget proposals also reduced the burden for the middle class, by raising the income tax threshold from 250,000 rupees to 500,000. Many of the measures were aimed at putting money into pockets quickly.
“This is not just an interim budget, this is a vehicle for the developmental transformation of the nation,” Acting Finance Minister Piyush Goyal told the lower house of parliament, as BJP lawmakers thumped their desks and chanted “Modi, Modi”.
“India is solidly back on track and marching towards growth and prosperity,” said Goyal, who delivered the budget instead of Finance Minister Arun Jaitley, who was undergoing medical treatment in the United States.
India was expected to expand 7.2 percent this fiscal year, Goyal said, keeping its slot as one of the world’s fastest growing major economies.
But a report in the Business Standard daily the previous day belied the government bullishness over the economy. It said that the government has been withholding an official survey that showed India’s unemployment rate at its highest in decades.
Garima Kapoor, an economist at Elara Capital investment bank in Mumbai, said the budget favored farmers, older voters, workers in the unorganized sector, small and medium sized businesses and middle class families.
“The budget is clearly farm-focused, with elections on the mind,” Kapoor said.The interim budget for 2019/20 allocated 600 billion rupees for a rural jobs program and 190 billion for building of roads in the countryside.
The big giveaways resulted in fiscal slippage, for a government that has been seeking to drag down its deficit.The budget would put the fiscal deficit for the year ending on March 31 at 3.4 percent of gross domestic product (GDP), slightly higher than the targeted 3.3 percent.
Goyal set a deficit target of 3.4 percent for 2019/20, instead of the earlier target of 3.1 percent, but he went onto project the deficit would come down to 3 percent in both of the following two years.
“The fiscal deficit flat at 3.4 percent of GDP, which is a sharp deviation from fiscal consolidation roadmap, is a disappointment. The consequent numbers of both net and gross market borrowings seem higher than the market expectation,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank in Mumbai.
India’s fiscal slippage also drew a warning from credit rating agency Moody’s Investors Service.
“Taken together, it doesn’t really bode well for their medium-term fiscal consolidation targets,” said Gene Fang, associate managing director at Moody’s sovereign risk group. “From that perspective we would say, on balance, it’s credit negative.”
But Fang said the budget announcements did not change the rating agency’s stance on India. Moody’s rates India at “Baa2” with a “stable” outlook.
India’s bond and currency markets see-sawed as investors were initially relieved the at fiscal slippage wasn’t any worse, but the market became jittery over the budget plan to borrow 7.04 trillion rupees in the coming fiscal year.
The benchmark 10-year bond yield was at 7.48 percent, having traded at 7.49 percent prior to the budget announcement, while the rupee firmed very slightly to trade at 71 against the U.S. dollar.