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Tax cuts to welfare support: Here's what to expect from Modi 3.0 1st Budget

Government is expected to reduce its deficit target slightly from the 5.1 per cent of gross domestic product projected before the elections

Modi, Narendra Modi

Reports suggest the government will expand the public health insurance program to cover all individuals aged over 70 years. | Photo: PTI

Bloomberg
By Ruchi Bhatia and Shruti Srivastava

Government's first budget under a new coalition government, Prime Minister Narendra Modi is expected to stick to a plan of curbing the fiscal deficit, while still cutting taxes and boosting welfare spending to keep his allies happy.
 
Government is expected to reduce its deficit target slightly from the 5.1 per cent of gross domestic product projected before the elections, according to economists in a Bloomberg survey. It’s also likely to focus on measures to lift consumer spending and jobs, especially in rural areas, after voters signaled their discontent with Modi’s Bharatiya Janata Party at the polls. 
 

Finance Minister Nirmala Sitharaman is scheduled to deliver her budget speech on Tuesday at 11 a.m. in New Delhi. Speaking to reporters outside the parliament on Monday, Modi said the budget will set out policies over the next five years that focuses on the youth, farmers, poor people and women. The budget will lay the groundwork for transforming India into a developed nation by 2047, he said.

A large windfall from the central bank and a surge in tax revenues as the economy expands more than 7 per cent this fiscal year gives the government ample resources to lift spending without damaging its deficit plans. 

The budget “will be an important platform for the government to signal its intent on fiscal consolidation, showcase how it plans to manage allies’ financial demands and present its vision for the next five years,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. 

''Despite Modi’s weaker political mandate, and demands from his two main coalition partners for billions of dollars in spending, the budget will likely signal policy continuity and a focus on maintaining fiscal credibility,'' Varma said.

Here’s a look at what’s expected from the finance minister’s speech:

Deficit and Borrowing
 
After surging to 9.2 per cent of GDP during the pandemic, the government has been steadily bringing down the fiscal deficit over the years, a key requirement for the country’s credit ratings to be upgraded. In February, Sitharaman had projected a deficit of 5.1 per cent for the fiscal year through March 2025, and pledged to lower it even further to 4.5 per cent by March 2026. 

Economists in a Bloomberg survey predict the government will be able to narrow its deficit to 5 per cent this year, largely thanks to a $25 billion record dividend from the central bank. Net direct tax collections have also grown at about 20 per cent so far this fiscal year, faster than the full-year estimate of 12 per cent given in the interim budget. 

All this adds up to an additional revenue of Rs 1.4 trillion ($16.7 billion), according to Pranjul Bhandari, chief India economist at HSBC Holdings Plc. “We believe the government will spend one part of this bounty, and save the other,” she wrote in the note, projecting a budget gap at 4.9 per cent of GDP in the current year.

A likely smaller deficit will allow the government to keep its borrowing needs unchanged at Rs14.1 trillion this fiscal year, according to the Bloomberg survey. That could give an extra fillip to India’s bond market, where benchmark yields are edging toward a two-year low.


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Lifting Consumption
 
The economy grew 8.2 per cent in the past fiscal year, but growth in private consumption, which makes up more than half of the country’s GDP, was a much slower 4 per cent. To give consumers a boost, the government may consider lowering personal income tax for those with the highest propensity to spend, Bloomberg News reported last month. Individuals with annual earnings of Rs 5,00,000 to Rs 15,00,000 — currently taxed anywhere from 5 per cent-20 per cent — could benefit from the move.

“Tax cuts for middle-income households is a high possibility along with higher expenditure allocation for marginal and rural section of the population,” said Kaushik Das, chief economist for India at Deutsche Bank AG.

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Welfare Support

The BJP will face a series of crucial state elections in coming months including in Maharashtra, Haryana and Delhi. To bolster its chances, economists expect the government to increase cash handouts for farmers and hike funds for rural housing. The government could also increase wage rates under the fixed employment program. 

Local media reports suggest the government will expand the public health insurance program to cover all individuals aged over 70 years, at an estimated cost of Rs 12,000 crore.

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Infrastructure Push
 
India’s economic revival since the pandemic has largely been driven by government spending on infrastructure, which has increased more than threefold since the 2018-19 budget. In February, Sitharaman raised the allocation for capital expenditure by 11.1 per cent for the current fiscal year, taking the spending to 3.4 per cent of GDP. 

Improving infrastructure was one of the BJP’s key election pledges and economists expect the Modi government to continue prioritizing spending billions on upgrading the nation’s roads, railways, seaports and airports, along with digital infrastructure like fibre-optic lines.

Manufacturing Boost
 
India’s lack of jobs despite its fast economic growth emerged as a key voter concern highlighted by opposition groups. The budget may see the government trying to address some of those concerns by boosting manufacturing and job creation.

The government in February said it will expand its production-linked incentives for labor-intensive sectors, including toys and leather and footwear sector. It may also extend the concessional 15 per cent corporate tax rate for new manufacturing entities beyond March 31, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, wrote in a note. 

There could also be more support measures for small and medium enterprises, which create the most jobs in the country. World Bank data shows the share of manufacturing in India’s GDP has declined from 16 per cent in 2015 to 13 per cent in 2023.  

Creating Jobs
 
According to Citigroup Inc. estimates, the government needs to create about 12 million jobs a year over the next decade to absorb those entering the labor market. Even with a 7 per cent growth rate, India can generate only 8-9 million jobs a year, according to the investment bank.

To address the issue, the government may introduce employment-linked incentives for companies, especially in the labor-intensive sectors, to boost job creation, local media reported.

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First Published: Jul 22 2024 | 10:51 AM IST

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