NEW DELHI: Indian Prime Minister Narendra Modi's first post-election budget will try on Tuesday to present an economic vision that balances fiscal prudence with the expectations of disgruntled voters and the demands of his coalition partners.
“This budget will decide the direction of our work for the next five years and it will lay the foundation for achieving our goal of making India a developed country by 2047,” Modi said on Monday ahead of the budget, to be presented by Finance. Minister Nirmala Sitharaman.
Modi's Hindu nationalist Bharatiya Janata Party (BJP) failed to win a majority in last month's election, leaving him dependent on allies to form a government for the first time since coming to power more than a decade.
The budget is expected to cut taxes for the middle class, provide relief to distressed rural areas and heed the demands of two key coalition partners – the Telugu Desam Party in Andhra Pradesh and the Janata Dal in Bihar (US) – for billions of dollars in additional funding for theirs. regions.
“Weaker political capital, uneven growth story with tepid consumption and lack of vigor in private investment and the rural sector form the backdrop for the upcoming budget,” said Madhavi Arora, economist at Emkay.
The government will also seek to keep at bay a resurgent opposition that has criticized the Modi government for a lack of jobs, the high cost of living and rising income inequality.
According to a report by the World Inequality Lab, the wealth concentrated in the richest 1% of India's population is the highest it has been in six decades, while youth unemployment stands at more than 17% according to government estimates.
INFRASTRUCTURE SPENDING
A government report released Monday estimated economic growth between 6.5 percent and 7 percent for the current fiscal year, slightly below consensus analysts' estimates.
However, the government has enough cover from the central bank to ensure it stays on course to close the budget gap and finance its infrastructure projects.
In May, the Reserve Bank of India transferred an additional $25 billion to the government, which will help it cover tax cuts, aid to rural areas and requests from coalition partners for regional funding.
Over the past three years, the government has nearly doubled spending on long-term infrastructure projects as a way to boost economic growth and generate jobs, and plans to spend 11 trillion rupees ($131.51 billion) on such of projects this year.
Some economists expect the budget could include improvements to a system of incentives for domestic and foreign companies to boost manufacturing in India in 14 sectors, including electronics, semiconductors and pharmaceuticals.
On Monday, the government's economic survey warned of rising risks from a rising stock market, which is also drawing retail investors to risky derivatives trading.
To discourage such risky investments, economists say the budget could include measures such as an increase in capital gains tax on long-term equity investments. However, such a move could be a major dampener for Indian stocks and could hurt the stock market, according to Morgan Stanley.
Any increase in transaction fees on derivatives would also be a negative surprise, Jefferies said.
Finance Minister Sitharaman is due to present the budget at 05:30 GMT.
