India’s new right-wing government on Thursday unveils its maiden budget that investors hope will spell out Prime Minister Narendra Modi’s strategy for restoring the country’s economic and fiscal health.
“Hopes are high Modi will usher in much-needed reforms to invigorate the economy and eventually do what it takes for India to live up to its economic potential — like China has,” Deepak Lalwani, head of India-focused consultancy Lalcap, said.
Shares have rocketed on expectations the Bharatiya Janata Party (BJP), which took office in May, will use the budget to flesh out campaign promises to lift Asia’s number-three economy from its longest stretch of sub-five per cent growth in a quarter-century.
Analysts say Finance Minister Arun Jaitley may slightly reduce a yawning fiscal deficit — the gap between revenue and spending — which stood at 4.5 per cent of gross domestic product last year.
But they say he is unlikely to reduce growth-promoting capital spending in the budget for the eight months left in this financial year to March 31, 2015 to significantly reduce the deficit.
“Reforms are likely to be piecemeal rather than in one ‘Big Bang’ package,” said Anjalika Bardalai, analyst at Eurasia Group.
Also, with two-thirds of India’s 1.25 billion population living on less than $2 a day, according to World Bank figures, and worries about a below-average monsoon hitting poor farmers, big subsidy cuts are unlikely, analysts say.
They expect Jaitley instead to outline steps to steer India from a culture steeped in bureaucratic red tape to a growth-boosting and more business-friendly investment climate that stresses fiscal discipline.
Growth has crashed from near double-digits a few years ago to 4.7 per cent in 2013, marking the second straight year of sub-five per cent expansion amid high interest rates, falling investment and wage-eroding inflation.
The finance ministry’s India Economic Survey forecast Wednesday the economy could expand 5.4-5.9 per cent this year, but cautioned the patchy annual rains, running at 42 per cent below average, threatened growth.
Since taking charge after a landslide win over the left-leaning Congress, swept out by voters angry about weak growth and scandals, Modi has sent strong signals he will pursue his “Modinomics” agenda of “maximum governance, minimum government”.
Modi has consolidated ministries and scrapped cabinet panels to streamline administration and speed decisions.
Jaitley has criticised “mindless populism” burdening public finances, and analysts say he may start paring expensive fuel subsidies.
Other highlights could include moves to exploit a surging stock market, fuelled by the BJP’s election, to seek to more than double privatisation revenues — a move that would lower government borrowing needs and please global credit ratings agencies.
To woo foreign investment, New Delhi may also scrap a controversial decision by the last government to retroactively tax overseas business deals involving Indian assets.
The levy prompted a $2.4 billion tax row with British mobile phone giant Vodafone, and was denounced as “tax terrorism” by critics who said it showed hostility to foreign investment.
Other announcements could include plans to move ahead on a nationwide goods-and-services tax to replace a complex web of levies to facilitate business transactions, and widening the tax net to raise revenues.
Also in the budget could be proposals to loosen complicated land-buying rules to speed up industrial projects and create jobs for a burgeoning youth population.
Source : Channel News Asia | July 10, 2014