This morning, India’s finance minister Arun Jaitley unveiled the budget for the 2018/19 financial year.

 

1). Key Policies

 

The government has announced a raft of measures in rural areas including 14.34 lakh crore (trillion) rupees in rural infrastructure and livelihood spending and an increase in the minimum support price of crops to at least 1.5 times their production cost. Furthermore, allocation to the food processing ministry was doubled for the next financial year with the promise of state-of the-art facilities at 42 ‘mega food parks’. It is hoped that these policies will increase growth in the agriculture sector, which at a projected 2.1% in FY 2017/18, currently lags well behind the rest of India’s economy. Jaitley also referred in his speech to the potential for Indian agricultural exports to reach $100bn USD, and pledged to liberalise agricultural exports.

 

The government has continued to make good on its pledge to reduce the burden of tax on businesses, by expanding the base of companies eligible to receiving the lower 25% corporate tax rate. Meanwhile, contrary to prior predictions, there were no changes to personal income tax slabs, despite the rapid escalation in inflation since the summer which has strained household incomes.

 

Other eye-catching policies include a pledge for the government to contribute 12% of wages of all new employees registered in the Employee Provident Fund over the next three years, a new healthcare scheme for 100,000 million poor families, and a 1.48 lakh crore Rs allocation for railways over FY 2018/19. Meanwhile, a 10% ‘social welfare surcharge’ was announced on imported goods, which chimes somewhat against the emphasis the government has previously placed on the importance of global trade.

 

2)      Fiscal stance

 

Due to the slowdown in growth and challenges with the roll out of the GST, the government was not able to meet its fiscal deficit reduction targets for FY 2017/18, with the fiscal deficit for this year projected to remain at 3.5% of GDP. The plan for FY 2018/19 was a fiscal deficit target of around 3% of GDP. However, to accommodate the policies outlined today, the loosened fiscal deficit target for FY 2018/19 is 3.3% of GDP. While an acceleration in growth next year and an estimated $16 billion USD sale of state assets are set to support tax revenues in FY 2018/19, there are risks ahead. But the improved bond ratings suggest that the markets will tolerate this widening.

 

3)      Impact on growth

 

India’s economy is likely to perform well in 2018, as external demand remains strong and the country begins to reap the benefits of major structural reforms. The looser fiscal stance signalled by today’s budget will act as an additional tailwind for growth in the near term. Cebr expects India’s economy to bounce back in 2018, growing by around 7.9% in real terms compared with Mr Jaitley’s forecast of 7.0-7.5%.

 

Contact:
Pablo Shah
pshah@cebr.com