Budget 2020: India announces $40 billion spending on farms, tax cuts

NEW DELHI: India’s government announced a multi-billion dollar package of farm and infrastructure support in its budget for 2020/21 as it blew past its fiscal deficit target for the year, but the stimulus fell short of market expectations and battered stocks.

India is grappling with its worst economic slowdown in a decade, with falling employment, consumption and investment ratcheting up pressure on Prime Minister Narendra Modi to revive growth.

The government estimates economic growth this year, which ends on March 31, will slip to 5%, the weakest pace since the global financial crisis of 2008-09. It has also warned that an expected bounce back in growth the following year might entail a blow out in fiscal deficit targets.

https://www.facebook.com/nirmala.sitharaman/videos/172873917310607/

Finance Minister Nirmala Sitharaman, presenting the 2020/21 budget for the financial year beginning April 1 to parliament on Saturday, said 2.83 trillion Indian rupees ($39.82 billion) will be allocated for agriculture and allied activities including helping farmers set up solar power generation units as well as establish a national cold storage to transport perishables.

“Farm markets need to be liberalized, farming need to be made more competitive” she said.

She also said the government will spend $50.65 billion on a federal water scheme to address the challenges facing one of the world’s most water stressed nations.

Agriculture accounts for 15% of India’s gross domestic product and a source of livelihood for more than half of the country’s 1.3 billion population.

But higher government spending has put pressure on public finances, prompting caution from rating agencies. Sitharaman said the fiscal deficit for the current year would widen to 3.8% of gross domestic product, up from 3.3% targeted for the current year.

For fiscal 2020/21 Sitharaman set the fiscal deficit at 3.5 percent as it boosts state funding to shore up a sagging economy that has intensified pressure on Modi, who is already facing a public backlash over a new citizenship law seen as socially divisive.`

Gene Fang, Associate Managing Director, Sovereign Risk, Moody’s Investors Service said: “India’s 2020/21 budget highlights the challenges to fiscal consolidation from slower real and nominal growth, which may continue for longer than the government forecasts.”

India’s government debt is already significantly higher than the average for Baa-rated sovereigns – a product of persistent fiscal deficits, it said.

“While India’s new budget calls for a modest narrowing of the deficit to 3.5% in the fiscal year 2020/21 from 3.8% in the fiscal year 2019/20, sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve.”

SHARES FALL

Indian shares slid to an over three-month low on Saturday, with sentiment dented by the lack of sufficient stimulus in the budget to lift the economy, analysts said.

The NSE Nifty 50 index dropped as much as 2.1% to 11,717.45, while the benchmark S&P BSE Sensex slumped 1.95%

“Markets had very high expectations from the budget, including that long term capital gains would be removed which would have incentivised people to hold on to shares for a longer time,” said Deepak Jasani of HDFC Securities.

“These expectations have not been met.”

Consumption, the bedrock of India’s $2.9 trillion economy, has fallen so much that the IMF cited it as one reason for trimming its global growth forecast last month.

Sitharaman announced the introduction of a new personal tax system under which she offered cuts for those ready to give up a myriad of existing tax breaks.

“People have reposed faith in our economic policy,” said Sitharaman to the thumping of desks in parliament. “This is a budget to boost their income and enhance their purchasing power.”

The government also announced higher duties on a host of imports from walnuts to automobiles and even smartphone components.

Sitharaman increased taxes on imports of pre-assembled printed circuit boards to 20% from the previous 10%, and imposed new taxes on mobile phones ringers, display panels in a bid to boost local manufacturing of smartphones, like neighbouring China.

To help generate revenue, she also announced the government will reduce stakes in the country’s largest insurer Life Insurance Corporation as part of its divestment programme.

In its annual economic report, released on Friday, the government predicted that growth would rebound to 6.0% to 6.5% in the fiscal year beginning April 1, but warned that it may have to exceed its deficit target to revive growth.

Some economists said global trade tensions and the outbreak of coronavirus in China, which has killed more than 250 people so far, pose a new risk to economic recovery by hitting cross-border commerce and supply chains.